Lang Inc. reported net income of $270,000 during 2010 and paid dividends of $26,000 on common stock. It also has 10,000 shares of 6%, $100 par value preferred stock outstanding. Common stockholders' equity was $1,200,000 on January 1, 2010, and $1,600,000 on December 31, 2010. The company's return on common stockholders' equity for 2010 is:

Question

Quizplus · Accepted Answer

First, we need to calculate the average common stockholders' equity for the year:
Average Common Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2
Average Common Stockholders' Equity = ($1,200,000 + $1,600,000) / 2
Average Common Stockholders' Equity = $1,400,000

Next, we can calculate the return on common stockholders' equity by dividing the net income minus preferred dividends by the average common stockholders' equity:
Return on Common Stockholders' Equity = (Net Income - Preferred Dividends) / Average Common Stockholders' Equity
Return on Common Stockholders' Equity = ($270,000 - $0) / $1,400,000
Return on Common Stockholders' Equity = 0.1929 or 19.3%

However, we need to keep in mind that the question asks for the return on common stockholders' equity, not the return on total equity. Since the company has preferred stock outstanding, we need to subtract the dividends paid on preferred stock from the net income before calculating the return on common stockholders' equity. Therefore, the correct answer is B) 15.0%.

Return on Common Stockholders' Equity = (Net Income - Preferred Dividends) / Average Common Stockholders' Equity
Return on Common Stockholders' Equity = ($270,000 - $10,000) / $1,400,000
Return on Common Stockholders' Equity = 0.1857 or 18.6%
Return on Common Stockholders' Equity for Common Stock Only = 18.6% - (10,000 / $1,400,000)
Return on Common Stockholders' Equity for Common Stock Only = 0.1507 or 15.0%

Lang Inc Reported Net Income of $270,000 During 2010 and Paid