The average stockholders' equity for Holloway Co.last year was $2,000,000.Included in this figure was $200,000 par value of 8 percent preferred stock.If the return on common stockholders' equity was 12.5 percent for the year,net income was
A)$225,000.
B)$250,000.
C)$241,000.
D)$234,000.

Question

Quizplus · Accepted Answer

The return on common stockholders' equity is calculated as net income divided by common stockholders' equity.  The common stockholders' equity is the average stockholders' equity minus the preferred stock.  Therefore, the common stockholders' equity is $2,000,000 - $200,000 = $1,800,000.  The return on common stockholders' equity is 12.5%, so the net income is $1,800,000 * 12.5% = $241,000.

The Average Stockholders' Equity for Holloway Co