PE 17-10A Common stockholders’ profitability analysis

A company reports the following:

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%