North Company reports the following amounts for 2017: $$\begin{array} { l r }
\text { Net income } & 160,000 \
\text { Average stockholders' equity } & 2,000,000 \
\text { Preferred dividends } & 45,000 \
\text { Parvalue preferred stock } & 250,000
\end{array}$$ The 2017 rate of return on common stockholders' equity is:
A) 5.8%.
B) 6.6%.
C) 8.0%.
D) 9.1%.

Question

North Company reports the following amounts for 2017: $$\begin{array} { l r } 
\text { Net income } & 160,000 \
\text { Average stockholders' equity } & 2,000,000 \
\text { Preferred dividends } & 45,000 \
\text { Parvalue preferred stock } & 250,000
\end{array}$$ The 2017 rate of return on common stockholders' equity is:
A) 5.8%.
B) 6.6%.
C) 8.0%.
D) 9.1%.

Quizplus · Accepted Answer

The rate of return on common stockholders' equity is calculated as: $\frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Average Common Stockholders' Equity}}$. Here, the average common stockholders' equity is the average stockholders' equity minus the par value of preferred stock, which is $2,000,000 - 250,000 = 1,750,000$. Thus, the rate of return is $\frac{160,000 - 45,000}{1,750,000} = 0.0657$ or 6.6%.

North Company Reports the Following Amounts for 2017 The 2017 Rate of Return on Common Stockholders' Equity Is