Ferman Corporation had net income of $140000 and paid dividends of $40000 to common stockholders and $20000 to preferred stockholders in 2021.Ferman Corporation's common stockholders' equity at the beginning and end of 2021 was $870000 and $1130000 respectively.Ferman Corporation's return on common stockholders' equity was

Question

Quizplus · Accepted Answer

Return on Common Stockholders' Equity = Net Income / Average Common Stockholders' Equity

Average Common Stockholders' Equity = (Beginning Common Stockholders' Equity + Ending Common Stockholders' Equity) / 2 = ($870000 + $1130000) / 2 = $1000000

Return on Common Stockholders' Equity = $140000 / $1000000 = 0.14 or 14%

However, common stockholders only received $40000 in dividends out of the total net income of $140000, which means that the company retained $100000 for reinvestment. Therefore, the actual return on common stockholders' equity is:

Return on Common Stockholders' Equity = (Net Income - Preferred Stock Dividends - Common Stock Dividends) / Average Common Stockholders' Equity = ($140000 - $20000 - $40000) / $1000000 = 0.08 or 8%

Therefore, the correct answer is B (12%).

Ferman Corporation Had Net Income of $140000 and Paid Dividends