Question

In the current year, Hermanson Corporation reported net income of $240,000, paid dividends of $25,000 on common stock, and $40,000 of dividends on preferred stock. Hermanson Corporation’s common stockholders’ equity was $700,000 at the beginning of the year and its common stockholders’ equity is $900,000 at the end of the year. The company’s return on common stockholders’ equity for the current year is

Answer 1

Answer:

Return on Common Equity: 12.5%

Explanation:

$\frac{income - preferred \: \: stock \: \: dividends}{common \: \: equity}$

equity income

240,000 - 40,000 = 200,000

average common equity:

700,000 + 900,000 = 1,600,000

return on common equity:

200,000 / 1,600,000 = 0.125 = 12.5%