Question

The numerator of the return on common stockholders' equity is_____________. a.income before income tax b.operating income minus interest expense c.net income d.net income minus preferred dividends

Answer 1

The numerator of the return on common stockholders' equity is net income minus preferred dividends.

Option d

Explanation:

Return on common stockholders' equity which is also named as return on equity (ROE) ratio evaluates the accomplishment of a company in resulting income for the benefit of common stakeholders.

Use of return on equity:

• Isolates common equity returns
• Can be used to evaluate dividends
• Evaluates the use of capital by the management

It is calculated by income available for stockholders divided by the total number of common stock and is expressed or represented in percentage. Income available for common stockholders can be arrived by reducing preference dividends from Net income.

That is, $\text { Net income }-\text { Preference dividends }=\text { Equity available for common stockholder }$

Hence, net income minus preferred dividends is the right answer.