Herman Corporation had net income of $100,000 and paid dividends of $25,000 to common stockholders and $20,000 to preferred stockholders in 2017. Herman Corporation's common stockholders' equity at the beginning and end of 2017s was $450,000 and $550,000, respectively. Herman Corporation's return on common stockholders' equity is
A)20.0%.
B)16.0%.
C)15.0%.
D)11.0%.

Question

Quizplus · Accepted Answer

Return on common stockholders' equity = (Net Income - Preferred Dividends) / Average Common Stockholders' Equity

First, we need to calculate the average common stockholders' equity:

Average Common Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2
= ($450,000 + $550,000) / 2 
= $500,000

Next, we can plug in the numbers given:

Return on common stockholders' equity = ($100,000 - $25,000) / $500,000 
= $75,000 / $500,000 
= 0.15 or 15%

Therefore, the correct answer is B) 16.0%.

Herman Corporation Had Net Income of $100,000 and Paid Dividends