   Chapter 10, Problem 55BE ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

#### Solutions ### Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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# Stockholder Profitability RatiosThe following information pertains to Capital Corporation: Required:Calculate the return on common equity and the earnings per share.

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) $1,005,000 Average Common Equity (B)$ 16,500,000 Preferred Dividends (C) \$2...

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