Question

Smith Company gives the following information on the financial statements: 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 What is the rate of return on common stockholder’s equity (to nearest percent)?

Answer 1

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 = $\frac{Net\ income - Preferred\ Dividends}{stockholder\ equity}$

=  $\frac{50000 - 8000}{180000}$

= 23%