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Average Common Stockholders’ Equity, Return on Stockholders’ Equity Rebert Inc. showed the following balances for last year: * For common stock only. Rebert’s net income for last year was $3,182,000. Required: 1. Calculate the average common stockholders’ equity. $ ___________ 2. Calculate the return on stockholders’ equity. ________ %
Expert Answer
| Solution: | |||||
| 1. | The average common stockholders’ equity = $11,925,000 | ||||
| Working Notes: | |||||
| The Common equity = Total stockholders’ Equity − Preferred Stock | |||||
| Beginning Common Equity = Total stockholders’ Equity − Preferred Stock | |||||
| = $15,800,000 – $4,000,000 | |||||
| = $11,800,000 | |||||
| Ending Common Equity = Total stockholders’ Equity − Preferred Stock | |||||
| = $16,050,000 – $4,000,000 | |||||
| = $12,050,000 | |||||
| Average Common Equity = (Beginning Common Equity + Ending Common Equity)/2 | |||||
| = ($11,800,000 + $12,050,000)/2 | |||||
| = $11,925,000 | |||||
| 2. | The return on stockholder’s equity = 24 % | ||||
| Working Notes: | |||||
| The return on stockholder’s equity = (net income – Preferred stock dividend )/ Average Common Equity | |||||
| = ($3,182,000 – (8% X $4,000,000))/$11,925,000 | |||||
| =($3,182,000 – $320,000)/$11,925,000 | |||||
| = $2,862,000/ $11,925,000 | |||||
| = 0.24 | |||||
| =24 % | |||||
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