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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Common stockholders’ profitability analysis

A company reports the following:

Net income $1,000,000
Preferred dividends 50,000
Average stockholders’ equity 6,250,000
Average common stockholders’ equity 3,800,000

Determine (a) the return on stockholders’ equity and (b) the return on common stockholders’ equity. Round percentages to one decimal place.

To determine

Evaluation of profitability: In general, financial ratios are used to evaluate capabilities, profitability, and overall performance of a company. The following are the ratios that evaluate the profitability of a company:

  • Profit margin ratio
  • Rate of return on total assets
  • Asset turnover ratio
  • Rate of return on common stockholders’ equity
  • Earnings per share
  • Dividend payout

To determine: Return on stockholders’equity

Given info: Net income, preference dividends, average stockholders’ equity and average common stockholders’ equity.

Explanation

Rate of return on stockholders’ equity is used to determine the relationship between the net income and the average common equity that are invested in the company.

Formula: Rate of re

b)

To determine
Return on common stockholders’ equity.

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