Net income$ 375,000
Preferred dividends75,000
Average stockholders’ equity 2,500,000
Average common stockholders’ equity 1,875,000
Determine (a) the rate earned on stockholders’ equity and (b) the rate earned on common stockholders’ equity. Round to one decimal place.
Answer:
a. Rate Earned on Stockholders’ Equity =
Rate Earned on Stockholders’ Equity
Rate Earned on Stockholders’ Equity
= $375,000 ÷ $2,500,000
= 15.0%
Rate Earned on Common
b. Stockholders’ Equity
Rate Earned on Common
Stockholders’ Equity
Rate Earned on Common
Net Income – Preferred Dividends
=
Average Common Stockholders’ Equity
= $375,000 – $75,000
Stockholders’ Equity = 16.0%