Question

Selected information for Irvington Company is as follows:December 31Year 1 Year 2Preferred stock, 8%, par $100, nonconvertible, noncumulative $125,000 $125,000Common stock 300,000 400,000Retained earnings 75,000 185,000Dividends paid on preferred stock for year ended 10,000 10,000Net income for year ended 60,000 120,000Irvington's return on common stockholders' equity, rounded to the nearest percentage point, for year 2 is

Answer 1

Answer:

ROE = 22.92%

Explanation:

$\frac{income-dividends_p}{average \: equity_{common}} = ROE$

upper part:

income: 120,000

preferred stock dividends: 10,000

net: 110,000

average common equity:

(beginning + ending )/2

((300,000 + 75,000) + (400,000+ 185,000))/2 = 480,000

$\frac{110,000}{480,000} = ROE$

110,000/480,000 = 0.2291667 = 22.92%