Question

The return on common stockholders’ equity is computed by dividing a) net income less preferred dividends by ending common stockholders’ equity. b) net income less preferred dividends by average common stockholders’ equity. c) net income by ending common stockholders’ equity. d) net income by average common stockholders’ equity.

Answer 1

Answer:

b) net income less preferred dividends by average common stockholders’ equity

Explanation:

Common stock dividends in a company is paid to stockholders after preferred dividends have been removed.

Preference shares are issued to investors with an agreement that they will recieve dividends before other shareholders.

So when calculating return on common stockholder's equity we will first deduct dividend paid to preference share holders.

The income coming to common share holders is now divided by average common stockholders equity to get the return on common stock equity.

Return on equity is usually used as a measure of how efficiently management uses company's assets to generate profits.