Question

The net income of a company for the year was $500,000. The company has no preferred stock. Common stockholders' equity was $1,200,000 at the beginning of the year and $2,500,000 at the end of the year. Calculate the rate of return on common stockholders' equity.

Answer 1

27.03%

Step-by-step explanation:

Average common stockholders' equity = (1,200,000+2,500,000) / 2

Average common stockholders' equity = $3,700,000 / 2

Average common stockholders' equity = $1,850,000

Rate of return on common stockholders' equity = Net Income / Average common stockholders' equity

Rate of return on common stockholders' equity = $500,000 / $1,850,000

Rate of return on common stockholders' equity = 0.27027

Rate of return on common stockholders' equity = 27.03%