Question

The following information pertains to Rural Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.

Assets

Cash and short-term investments
$ 40,000
Accounts receivable (net)
30,000
Inventory
40,000
Property, plant and equipment
220,000

Total Assets
$330,000
Liabilities and Stockholders' Equity

Current liabilities
$ 60,000
Long-term liabilities
70,000
Stockholders' equity—common
200,000

Total Liabilities and Stockholders' Equity
$330,000

Income Statement


Sales

$ 90,000
Cost of goods sold
44,000
Gross profit
46,000
Operating expenses
30,000

Net income
$ 16,000

Number of shares of common stock
5,000
Market price of common stock
$22
Dividends per share
1.00

What is the return on common stockholders' equity for Rural?
A) 4.8%
B) 8%
C) 37.5%
D) 16%

Answer 1

The return on common stockholders' equity for Rural Company is calculated by dividing net income by common stockholders' equity and is found to be 8%.

Step-by-step explanation:

The return on common stockholders' equity for Rural Company can be calculated by dividing the net income by the common stockholder's equity and then multiplying the result by 100 to get the percentage. The net income for Rural is $16,000 and the stockholders' equity amounts to $200,000. Therefore, the return on equity (ROE) is calculated as follows:

Return on Common Stockholders' Equity = (Net Income / Stockholders' Equity) × 100
Return on Common Stockholders' Equity = ($16,000 / $200,000) × 100
Return on Common Stockholders' Equity = 8%

Thus, the correct answer is B) 8%.