Question

Kong Inc. reported net income of $298,000 during 2018 and paid dividends of $26,000 on common stock. It also has 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. Common stockholders' equity was $1,200,000 on January 1, 2018, and $1,600,000 on December 31, 2018. The company's return on common stockholders' equity for 2018 is: A. 17.4% B. 17.0% C. 15.1% D. 21.3%

Answer 1

B. 17.0%

Step-by-step explanation:

The computation of the return on common stockholders' equity is shown below:

= (Net income - preference dividend) ÷ (Average Common stockholders' equity)

where,

Net income is $298,000

Preference dividend = 10,000 shares × $100 × 6% = $60,000

And, the Average Common stockholders' equity would be

= (Opening Common stockholders' equity + Ending Common stockholders' equity) ÷ 2

= ($1,200,000 + $1,600,000) ÷ 2

= $1,400,000

Now put these values to the above formula

So, the value would equal to

= ($298,000 - $60,000) ÷ ($1,400,000)

= 17%