Question

On January 1, 2022, Pina Colada Corp. purchased 5,000 shares of treasury stock. Other information regarding Pina Colada Corp. is provided as follows.

		2022		2021
Net income		$107,700		$100,000
Dividends on preferred stock		$27,895		$27,895
Dividends on common stock		$27,800		$18,950
Weighted-average number of common shares outstanding		36,800		55,000
Common stockholders’ equity beginning of year		$715,000		$550,000
Common stockholders’ equity end of year		$736,000		$715,000

(a)

Compute return on common stockholders’ equity for each year. (Round answers to 1 decimal place, e.g. 15.2.)

		2022		2021
Return on common stockholders' equity		enter the ratio in percentages rounded to 1 decimal place %		enter the ratio in percentages rounded to 1 decimal place %

Answer 1

Solution :

The formula for calculating the return on common stockholders’ equity is

= ( Net Income – Preferred Stock ) / Average stock holders’ equity

Where

Average Common stockholders’ equity = ( Common stockholders’ equity beginning of year + Common stockholders’ equity end of year ) / 2

Calculation of return on common stockholders’ equity for the year 2021 :

As per the information given in the question for the year 2021 we have

Net Income = $ 100,000   ;   Preferred Stock = $ 27,895   ;

Common stockholders’ equity beginning of year = $ 550,000 ;   Common stockholders’ equity end of year = $ 715,000   ;

Thus we have Average Common stockholders’ equity for the year 2021 as

= ( $ 550,000 + $ 715,000 ) / 2

= $ 1,265,000 / 2

= $ 632,500

Applying the above information in the formula we have return on common stockholders’ equity as

= ( $ 100,000 - $ 27,895 ) / $ 632,500

= $ 72,105 / $ 632,500

= 0.1140

= 11.40 %

= 11.4 % ( when rounded off to two decimal places )

Thus the return on common stockholders’ equity for the year 2021 = 11.4 %

Calculation of return on common stockholders’ equity for the year 2022 :

As per the information given in the question for the year 2022 we have

Net Income = $ 107,700   ;   Preferred Stock = $ 27,895   ;

Common stockholders’ equity beginning of year = $ 715,000 ;   Common stockholders’ equity end of year = $ 736,000   ;

Thus we have Average Common stockholders’ equity for the year 2022 as

= ( $ 715,000 + $ 736,000 ) / 2

= $ 1,451,000 / 2

= $ 725,500

Applying the above information in the formula we have return on common stockholders’ equity as

= ( $ 107,700 - $ 27,895 ) / $ 725,500

= $ 79,805 / $ 725,500

= 0.1100

= 11.00 %

= 11.0 % ( when rounded off to two decimal places )

Thus the return on common stockholders’ equity for the year 2022 = 11.0 %