Selected financial information is shown below. Additionally we know that cash di

Question

Selected financial information is shown below. Additionally we know that cash dividends declared and paid during YEAR 2 totaled $173,000, of which $20,000 were preferred dividends. The market price of a share common stock on December 31, Year 2 was $200. Use the information to calculate the return on common stockholders’ equity for YEAR 2. Round your final answers to two places after the decimal point.

Year 2 Year 1
Stockholder’s Equity:
Preferred stock, $10 par, 10% $200,000 $200,000
Common stock, $10 par $200,000 $200,000
Additional paid-in capital common stock 180,000 180,000
Retained Earnings 1,460,000 1,340,000
Total stockholders’ equity $2,040,000 $1,920,000
Total liabilities & stockholders’ equity $2,500,000 $2,430,000
Net Income $300,000

Explanation / Answer

Total dividend 173000 Preferencial dividend 20000 For Equity holders 153000 Return on Equity = Net income / Shareholders Equity Calculation of Common stockholders Equity: Common stock 200000 Additional paid in capital 180000 Retained earnings 1460000 Equity: 1840000 Net income = Net income - Preferred dividend = 300000 - 20000 = 280000 Return on Equity = 280000 / 1840000 Return on Equity = 0.15 Absolute return on equity = 153000 / 1840000 Absolute return = 0.08 Thank you.... Total dividend 173000 Preferencial dividend 20000 For Equity holders 153000 Return on Equity = Net income / Shareholders Equity Calculation of Common stockholders Equity: Common stock 200000 Additional paid in capital 180000 Retained earnings 1460000 Equity: 1840000 Net income = Net income - Preferred dividend = 300000 - 20000 = 280000 Return on Equity = 280000 / 1840000 Return on Equity = 0.15 Absolute return on equity = 153000 / 1840000 Absolute return = 0.08

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