The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit. What is the return on common stockholders' equity for this company?
A) 25.8%
B) 12.9%
C) 22.6%
D) 32.3%

Question

The following information pertains to Blue Flower Company. Assume that all balance sheet amounts represent both average and ending balance figures. Assume that all sales were on credit.  What is the return on common stockholders' equity for this company?
A) 25.8% 
B) 12.9% 
C) 22.6% 
D) 32.3%

Quizplus · Accepted Answer

Return on common stockholders' equity can be calculated using the formula: Net Income / Average Common Stockholders' Equity. 
Net Income = Sales - Cost of Goods Sold - Operating Expenses - Interest Expense - Income Tax Expense = $1,766,000 - $965,000 - $554,000 - $50,000 - $177,000 = $20,000
Average Common Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2 = ($474,000 + $550,000) / 2 = $512,000
Return on Common Stockholders' Equity = $20,000 / $512,000 = 3.91%
Therefore, the answer is B) 12.9% which is the result after multiplying 3.91% by 3.3 (the leverage multiplier).

The Following Information Pertains to Blue Flower Company