Question

Quantitative Reasoning Problem 2

ACC 122

Assignment is to be completed as a Word Document, PDF, or on notebook paper and submitted through Moodle

The table below contains letters a, b, c, d.

	2018	2017
Average common stockholder equity	$1,800,000	$1,900,000
Dividends paid to common shareholders	90,000	70,000
Dividends paid to preferred shareholders	20,000	20,000
Net Income	290,000	248,000
Market Price of common stock	$20	$25
Weighted average number of shares common stock outstanding	150,000	180,000
Earnings per share	(a)	(b)
Return on common stockholders equity	(c)	(d)

Tell what these formulas are used for : Earnings per share; Return on common stockholder equity

Show all your computations or calculations for each of the letters (a), (b), (c ) (d)

Provide a sentence of explanation for each answer telling why you did what you did

Answer 1

• All working forms part of the answer
• Solution for (a) and (b) - Earnings per share

Earnings per share (or EPS) = [ Net Income (-) Preferred Stock dividend ] / Weighted Average no. of common stock outstanding.

Working		2018	2019
A	Net Income	$    2,90,000.00	$            2,48,000.00
B	Dividend paid to preferred stocks	$       20,000.00	$                20,000.00
C = A - B	Net Income available to common stockholders	$    2,70,000.00	$            2,28,000.00
D	Weighted Average no. of shares common stock outstanding	150000	180000
E = C / D	Earnings per share	$                  1.80 [Answer (a)]	$                          1.27 [Answer (b)]

---Earning per share refers to amount that common stockholder’s are earning ‘per share of common stock’. That’s why Preferred Stock dividend is ‘deducted’ from Net Income, because that part does not constitute as ‘earnings for common stock’.

---EPS is the amount that common stockholder’s have earned ‘over a period of time’ on one share. Hence, weighted average number of stock outstanding during the year is considered.

• Solution for (c) and (d) – Return on Common Stockholder’s Equity

Return on Common Stockholder’s Equity = Net Income (-) Preferred Stock dividend ] / Average common stockholder Equity

Working		2018	2019
A	Net Income	$    2,90,000.00	$            2,48,000.00
B	Dividend paid to preferred stocks	$       20,000.00	$                20,000.00
C = A - B	Net Income available to common stockholders	$    2,70,000.00	$            2,28,000.00
D	Average Common Stockholder Equity	$ 18,00,000.00	$          19,00,000.00
E = (C / D ) x 100	Return on Common Stockholders’ Equity	15% [Answer (c)]	12% [Answer (d)]

---Return on SH Equity refers to the earning rate for common stock shares and what common stockholder’s have been earning on their equity.