Final answer:
It is true that the rate of return on common shareholders' equity is calculated by dividing net income less preferred dividends by average common shareholders' equity. This figure helps assess a company's profitability for common shareholders. Trends in the S&P 500 indicate that dividends have decreased since the 1980s, while capital gains have played a larger role in total returns.
Step-by-step explanation:
The statement that the rate of return on common shareholders' equity is calculated by dividing net income less preferred dividends by average common shareholders' equity is true. This financial metric is used to assess a company's profitability from the common shareholder's perspective. It offers investors a snapshot of how effectively their capital is being used to generate profits.
Investors have traditionally looked for returns from two sources: dividends and capital gains. Dividends represent a direct payment from the company to its shareholders, while capital gains arise from the increase in the stock's price over time. Historical trends from the S&P 500 index reveal that dividend rates were higher in the past (around 4% of the stock value from the 1950s to the 1980s), and have since decreased to about 1% to 2% in more recent decades. Meanwhile, capital gains have often presented the more significant component of total returns, particularly since the 1980s.