Question

Common Stockholders' Profitability Analysis

A company reports the following:

Net income	$285,000
Preferred dividends	11,400
Average stockholders' equity	2,567,568
Average common stockholders' equity	1,266,667

Determine (a) the the return on stockholders’ equity and (b) the return on common stockholders’ equity. If required, round your percentages to one decimal place.

a. The rate earned on stockholders' equity	%
b. The rate earned on common stockholders' equity

Answer 1

Part - a:

Computation the rate on stockholders' equity is:

Rate on stockholders' equity = (Net income of the company / Value of average stockholders' equity) * 100

= ($285,000 / $2,567,568) * 100

= 0.111 * 100

= 11.1%

Hence, the rate on stockholders' equity is 11.1%.

Part - b:

Computation the rate on common stockholders' equity is:

Rate on common stockholders' equity = [(Net income of the company - Value of dividend on preferred shares) / Value of average common stockholders' equity] * 100

= [($285,000 - $11,400) / $1,266,667] * 100

= [$273,600 / $1,266,667] * 100

= 0.216 * 100

= 21.6%

Hence, the rate on common stockholders' equity is 21.6%.