Question

A company reports the following: Net income $375,000 Preferred dividends 75,000 Average stockholders' equity 2,500,000 Average common stockholders' equity 1,875,000 Determine (a) the return on stockholders’ equity and (b) the return on common stockholders’ equity. Round percentages to one decimal place.

Answer 1

a) The return on stockholders’ equity = 15%

b) The return on common stockholders’ equity = 16%

Step-by-step explanation:

a) Return on Stockholders’ Equity = (Net income)/(Average stockholders' equity)

= ($375,000)/$2,500,000

= 15%

b) Return on Common Stockholders’ Equity = (Net income - Preferred dividends) /(Average return on common stockholders' equity)

= ($375,000 - $75,000) / $1,875,000

= 16%