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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Stockholder Profitability Ratios

The following information pertains to Montague Corporation

Chapter 10, Problem 37CE, Stockholder Profitability Ratios The following information pertains to Montague Corporation

Required:

Calculate the return on common equity and the earnings per share. (Note: Round answers to two decimal places.)

To determine

Concept introduction:

Return on Equity:

Return on Equity is the rate of return earned by the Stockholders on their investment in the company. It is calculated with the help of following formula:

Return on Equity = Net IncomeAverage Stockholders Equity

The Average stock holder’s equity calculated with the help of following formula:

Average stock holders equity=( Beginning stock holders equity + Ending stock holders equity)2

Basic Earnings per share:

The Basic Earnings per share is the amount of net income earned by each common share outstanding. The Earnings per share calculated by with help of following formula:

Basic Earnings per share=Net Income - Preferred DividendWeighted Average Common Shares Outstanding

 Net Income available to common stockholder = Net income  Preferred Dividend

To calculate:

The Return on Equity and Earnings per share.

Explanation

The Return on Equity and Earnings per share are calculated as follows:

Net Income (A) $ 1,800,000
Average Common Equity (B) $ 22,350,000
Preferred Dividends (C) $3...

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