Question
In: Accounting
Determine (a) the return on stockholders’ equity and (b) the return on common stockholders’ equity. Round percentages to one decimal place.
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.
Solutions
Expert Solution
Financial ratios : In general, financial ratios are used to assess a company's capabilities, profitability, and overall performance.
Rate of retun on stockholder's equity : The rate of return on stockholders' equity is used to calculate the link between net income and the average amount of common equity invested in the firm.
Formual for calculationg Rate of retrun on stockholder's equity
Rate of return on stockholder's equity = Net income / Average stockholder's equity
=$375,000 / $2,500,000
=15.0%
Rate of return on common stockholder's equity :The rate of return on common stockholders' equity is used to calculate the relationship between the difference between net income and preference dividends and the average amount of common equity in the firm.
Formula for calculationg Rate of return on common stockholder's equity
Rate of return on common stockholder's equity = Net income - Preferred Dividends / Average common stockholder's equity
=$375,000 - $75,000 / $1,875,000
=16.0%
(a)Therefore, rate of return on stockholder's equity is 15.0%
(b)Therefore, rate of return on common stockholder's equity is 16.0%
balaji rao answered 2 years agoRelated Solutions
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