Nikos Company paid preference dividends of €210,000 and reported net income of €620,000.Its average ordinary shareholders' equity is €2,000,000 and it has 200,000 ordinary shares outstanding.The rate of return on ordinary share equity for the Nikos Company is approximately:

Question

Quizplus · Accepted Answer

The calculation for the rate of return on ordinary share equity (ROE) is:

ROE = Net Income / Average Ordinary Shareholders' Equity

ROE = €620,000 / €2,000,000

ROE = 0.31 or 31%

However, preference dividends need to be subtracted from net income to get the amount of income available to ordinary shareholders.

Income available to ordinary shareholders = Net Income - Preference dividends

Income available to ordinary shareholders = €620,000 - €210,000

Income available to ordinary shareholders = €410,000

So, the correct calculation for ROE is:

ROE = Income available to ordinary shareholders / Average Ordinary Shareholders' Equity

ROE = €410,000 / €2,000,000

ROE = 0.205 or 20.5%

Thus, the answer is B) 21%.

Nikos Company Paid Preference Dividends of €210,000 and Reported Net