Question

The balance sheets at the end of each of the first two years of operations indicate the following:

	2017		2016
Total current assets	$600,000		$560,000
Total investments	60,000		40,000
Total property, plant, and equipment	900,000		700,000
Total current liabilities	125,000		80,000
Total long-term liabilities	350,000		250,000
Preferred 9% stock, $100 par	100,000		100,000
Common stock, $10 par	600,000		600,000
Paid-in capital in excess of par--common stock	60,000		60,000
Retained earnings	325,000		210,000

Based on the above information, if net income is $130,000 and interest expense is $40,000 for 2017, what is the return on stockholders' equity for 2017 (round to one decimal place)?

a.13.2%

b.12.7%

c.12.0%

d.16.5%

Answer 1

The correct answer is option (b) i.e. 12.7%
Return on stockholders' equity = (Net income / Average stockholder's equity) =(130,000/1,027,500) = 12.7%
Average stockholder's equity
	2017	2016
Preferred 9% stock, $100 par	100,000	100,000
Common stock, $10 par	600,000	600,000
Paid-in capital in excess of par--common stock	60,000	60,000
Retained earnings	325,000	210,000
Total stockholder's equity	1,085,000	970,000
Average equity = (1,085,000+970,000) / 2 = 1,027,500