Question

Q 11.20: Katie Inc. reported net income of $171,000 for the current year and paid dividends of $26,000 on common stock. It also has 10,000 shares of 6%, $100 par value, noncumulative preferred stock outstanding. Common stockholders’ equity was $1,200,000 on January 1 and $1,600,000 on December 31.
The company’s return on common stockholders’ equity for the current year is _____%.

Answer 1

Answer:

The company's return on common stockholders’ equity for the current year is 8%

Explanation:

Step 1: Determine net income available to common stockholders

The net income available to common stockholder can be expressed as;

net income available to common stockholders=net income-preferred stocks dividends

where;

net income=$171,000

preferred stocks dividends=$10,000×0.06×100=$60,000

replacing;

net income available to common stockholders=171,000-(10,000×0.06×100)=$111,000

Step 2: Determine the company's return on stockholder's equity for the current year

This can be expressed as;

The company’s return on common stockholders’ equity for the year=net income available to common stockholders/(common stock holders equity on January 1+common stockholders equity on December 31)/2

where;

net income available to common stockholders=$111,000

common stock holders equity on January 1=$1,200,000

common stockholders equity on December 31=$1,600,000

replacing;

($111,000/ ($1,200,000 +$1,600,000)/2))=(111,000/1,400,000)×100=7.93%=8%

The company's return on common stockholders’ equity for the current year is 8%