Question

Which of the following companies has the highest return on common stockholders’ equity?

A : a company with a net income of $17 million, preferred dividends of $950,000, and average common stockholders’ equity of $90 million
B : a company with a net income of $22 million, preferred dividends of $0, and average common stockholders’ equity of $280 million
C : a company with a net income of $45 million, preferred dividends of $3 million, and average common stockholders’ equity of $547 million
D : a company with a net income of $31 million, preferred dividends of $830,000, and average common stockholders’ equity of $412 million

Answer 1

So Option A has the highest return on common stockholders equity which is 17.8%

Step-by-step explanation:

First we will calculate the return on each each stockholder equity by using the following formula:

Return=(Net Income-preferred dividends)/Average common stockholder equity

Part A:

`Return=((17 million -950,000))/(90 million)`

Return=17.8%

Part B:

`Return=((22 million -0))/(280 million)`

Return=7.9%

Part C:

`Return=((45 million -3 million))/(547 million)`

Return=7.7%

Part D:

`Return=((31 million -830000))/(412 million)`

Return=7.3%

So Option A has the highest return on common stockholders equity which is 17.8%