Question

Q 11.27: What is the return on common stockholders’ equity based on the following: Beginning Common Stockholders’ Equity: $10,317,000 Ending Common Stockholders’ Equity: $10,662,000 Net Income: $1,429,000 Preferred Stock throughout the year: 6%, $75 par (8,000 shares authorized, issued, and outstanding). A :

Answer 1

13.3%

Step-by-step explanation:

Given: Beginning Common Stockholders’ Equity: $10,317,000.

Ending Common Stockholders’ Equity: $10,662,000.

Net Income: $1,429,000

Preferred stock: 8000 shares 6% at $75.

First, let calculate average common stockholder equity.

Average common stockholder equity=
`((Beginning\ equity+ending\ equity))/(2)`

⇒ Average common stockholder equity=
`((10317000+10662000))/(2) = (20979000)/(2)`

∴ Average common stockholder equity= $10489500.

Now, calculating preferred dividend.

⇒ Preferred dividend=
`(8000 shares* \$ 75* 6\%) = \$ 36000`

∴ Preferred dividend= $36000.

Next, computing return on common shareholder equity.

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

Return on equity=
`((1429000-36000))/(10489500) = (1393000)/(10489500)* 100`

∴ Return on equity= 13.3%

∴ Return on common stockholders´ equity is 13.3%