Question

Common Stockholders' Profitability Analysis

A company reports the following:
Net income
Preferred dividends
Average stockholders' equity
Average common stockholders' equity
$135,000
5,400
1,194,690
644,776
Determine (a) the return on stockholders’ equity and (b)
the return on common stockholders' equity. If required,
round your answers to one decimal place.
a. Return on Stockholders' Equity
b. Return on Common Stockholders' Equity
11.3
%
18.5 X %

Answer 1

The return on stockholders' equity is 11.3% and the return on common stockholders' equity is 20.1%.

Explanation:

To calculate the return on stockholders' equity and the return on common stockholders' equity, we can use the following formulas:

Return on Stockholders' Equity = Net Income / Average Stockholders' Equity

Return on Common Stockholders' Equity = Net Income - Preferred Dividends / Average Common Stockholders' Equity

Using the given values, we can calculate:

a. Return on Stockholders' Equity:

Return on Stockholders' Equity = $135,000 / $1,194,690

Return on Stockholders' Equity = 0.113 or 11.3%

b. Return on Common Stockholders' Equity:

Return on Common Stockholders' Equity = ($135,000 - $5,400) / $644,776

Return on Common Stockholders' Equity = $129,600 / $644,776

Return on Common Stockholders' Equity = 0.201 or 20.1%

Therefore, the return on stockholders' equity is 11.3% and the return on common stockholders' equity is 20.1%.