Question

Ferman Corporation had net income of $160,000 and paid dividends of $50,000 to common stockholders and $20,000 to preferred stockholders in 2014. Ferman Corporation's common stockholders' equity at the beginning and end of 2014 was $870,000 and $1,130,000, respectively. Ferman Corporation's return on common stockholders' equity wasa. 16%.b. 14%.c. 11%.d. 9%.

Answer 1

Answer: Option (b) is correct.

Step-by-step explanation:

Given that,

Net income = $160,000

Dividend paid to common stockholder = $50,000

Dividend paid to preferred stockholders = $20,000

common stockholders' equity at the beginning = $870,000

common stockholders' equity at the end = $1,130,000

`Average\ common\ stockholders\ equity=(Beginning\ Balance + Ending\ Balance)/(2)`

`Average\ common\ stockholders\ equity=(870,000 + 1,130,000)/(2)`

`=(2,000,000)/(2)`

= 1,000,000

`Return\ on\ common\ stockholders\ equity=(Net\ income-preferred\ dividend)/(Average\ common\ stockholders\ equity)`

`Return\ on\ common\ stockholders\ equity=(160,000-20,000)/(1,000,000\ equity)`

= 14%