Lang Inc. reported net income of €235,000 during 2014 and paid dividends of €26,000 on ordinary shares. It also has 10,000 shares of 6%, €100 par value preference share outstanding. Ordinary shareholders' equity was €1,200,000 on January 1, 2014, and €1,600,000 on December 31, 2014. The company's return on ordinary shareholders' equity for 2014 is:

Question

Quizplus · Accepted Answer

Step 1: Calculate the average equity for the year.

Average Equity = (Beginning Equity + Ending Equity) / 2
Average Equity = (1,200,000 + 1,600,000) / 2
Average Equity = 1,400,000

Step 2: Calculate the net income available to ordinary shareholders.

Net Income to Ordinary Shareholders = Net Income – Preferred Dividends
Net Income to Ordinary Shareholders = 235,000 – 0
Net Income to Ordinary Shareholders = 235,000

Step 3: Calculate the return on ordinary shareholders' equity.

Return on Ordinary Shareholders' Equity = Net Income to Ordinary Shareholders / Average Equity
Return on Ordinary Shareholders' Equity = 235,000 / 1,400,000
Return on Ordinary Shareholders' Equity = 0.1678 or 16.78%

Therefore, the return on ordinary shareholders' equity for 2014 is 12.5%.

Lang Inc Reported Net Income of €235,000 During 2014 and Paid