Q 11.27: What is the return on common stockholders’ equity based on the following: Beginning Common Stockholders’ Equity: $10,317,000 Ending Common Stockholders’ Equity: $10,662,000 Net Income: $1,429,000 Preferred Stock throughout the year: 6%, $75 par (8,000 shares authorized, issued, and outstanding). A :

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jitushashi120 jitushashi120 · Answer 1 · 2019-12-10T13:52:25+01:00

Answer:

13.3%

Explanation:

Given: Beginning Common Stockholders’ Equity: $10,317,000.

Ending Common Stockholders’ Equity: $10,662,000.

Net Income: $1,429,000

Preferred stock: 8000 shares 6% at $75.

First, let calculate average common stockholder equity.

Average common stockholder equity= [tex]\frac{(Beginning\ equity+ending\ equity)}{2}[/tex]

⇒ Average common stockholder equity= [tex]\frac{(10317000+10662000)}{2} = \frac{20979000}{2}[/tex]

∴ Average common stockholder equity= $10489500.

Now, calculating preferred dividend.

⇒ Preferred dividend= [tex](8000 shares\times \$ 75\times 6\%) = \$ 36000[/tex]

∴ Preferred dividend= $36000.

Next, computing return on common shareholder equity.

Return on equity= [tex]\frac{(Net\ income - preferred\ dividend)}{ Average\ shareholder\ equity}[/tex]

Return on equity= [tex]\frac{(1429000-36000)}{10489500} = \frac{1393000}{10489500}\times 100[/tex]

∴ Return on equity= 13.3%

∴ Return on common stockholders´ equity is 13.3%