Question

Common Stockholders' Profitability Analysis A company reports the following: Net income $195,000 Preferred dividends 7,800 Average stockholders' equity 1,466,165 Average common stockholders' equity 878,873 Determine (a) the the return on stockholders’ equity and (b) the the return on common stockholders’ equity. If required, round your percentages to one decimal place. a. Rate earned on stockholders' equity % b. Rate earned on common stockholders' equity %

Answer 1

Answer of Part a:

Return on Stockholders' Equity = Net Income / Average stockholders' Equity
Return on Stockholders' Equity = $195,000 / $1,466,165
Return on Stockholders' Equity = 13.3%

Answer of Part b:

Return on Common Stockholders' Equity = (Net Income - Preferred Dividend) / Average Common Stockholders' Equity
Return on Common Stockholders' Equity = ($195,000 - $7,800) / $878,873
REeturn on Common Stockholders' Equity = $187,200 / $878,873
Return on Common Stockholders' Equity = 21.3%