Answer: The rate of return on common stockholder’s equity is 23%.
Explanation:
Given that,
Net Income = $50,000
Preferred Dividends = 8,000
Average Common Stockholder’s Equity = 180,000
Average number of Common Shares Outstanding = 250,000 shares
Market Price = $2 per share
Therefore,
Return on equity =
=
= 23%
Answer: C. The decline in the P/E ratio more than offset earnings growth and this pushed the market cap down.
Explanation:
Market Cap = P/E ratio * Earnings
Market cap is dependent on both the P/E ratio and Earnings as shown by the formula and as shown on the graph, the P/E ratio kept on decreasing which means that for the Market Cap to decrease, the downward pull of the P/E ratio must have overshadowed the growth in earnings such that the Market Cap went down instead of up.
For instance, if the earnings were $40 billion and the P/E ratio was 15, Market Cap would be $600 billion.
If earnings increased to $45 billion but P/E ratio decreased to 10, Market Cap would become $450 billion.
