Question

Q 11.27: What is the return on common stockholders’ equity based on the following: Beginning Common Stockholders’ Equity: $10,317,000 Ending Common Stockholders’ Equity: $10,662,000 Net Income: $1,429,000 Preferred Stock throughout the year: 6%, $75 par (8,000 shares authorized, issued, and outstanding). A :

Answer 1

Answer:

13.3%

Explanation:

Given: Beginning Common Stockholders’ Equity: $10,317,000.

           Ending Common Stockholders’ Equity: $10,662,000.

            Net Income: $1,429,000

            Preferred stock: 8000 shares 6% at $75.

First, let calculate average common stockholder equity.

Average common stockholder equity= $\frac{(Beginning\ equity+ending\ equity)}{2}$

⇒ Average common stockholder equity= $\frac{(10317000+10662000)}{2} = \frac{20979000}{2}$

∴ Average common stockholder equity= $10489500.

Now, calculating preferred dividend.

⇒ Preferred dividend= $(8000 shares\times \ 75\times 6\%) = \ 36000$

∴ Preferred dividend= $36000.

Next, computing return on common shareholder equity.

Return on equity= $\frac{(Net\ income - preferred\ dividend)}{ Average\ shareholder\ equity}$    

Return on equity= $\frac{(1429000-36000)}{10489500} = \frac{1393000}{10489500}\times 100$

∴ Return on equity= 13.3%

∴ Return on common stockholders´ equity is 13.3%