Coronation Computers opened the fiscal year with a balance sheet showing retained earnings at $355,000, and common shares at $1.2 million. It added another $500,000 from the sale of 200,000 preferred shares, which paid $.35 a share in dividends in the last quarter of the fiscal year. If the Company's net income for the year was a $412,100 and there were no dividends paid to common shareholders, what was its return on equity?

Question

Quizplus · Accepted Answer

Return on equity (ROE) is calculated as Net Income divided by Shareholder's Equity. Shareholder's Equity at the end of the year is the sum of retained earnings, common shares, and preferred shares. The preferred shares added $500,000, making total equity $2,055,000 ($355,000 + $1,200,000 + $500,000). ROE = $412,100 / $2,055,000 = 20.05%, closest to 19.8%.

Coronation Computers Opened the Fiscal Year with a Balance Sheet