The Hummel Corporation reported the following income statement and balance sheet amounts and additional information for the end of the current year. Inventory and prepaid expenses account for $28,000 of the current year's current assets.
Average inventory for the current year is $12,000.
Average net accounts receivable for the current year is $32,000.
There are 40,000 shares of common stock outstanding.
Total dividends paid during the current year were $60,000.
The market price per share of common stock is $25.
What is the company's rate of return on common stockholder's equity for the current year?

Question

The Hummel Corporation reported the following income statement and balance sheet amounts and additional information for the end of the current year.  Inventory and prepaid expenses account for $28,000 of the current year's current assets.
Average inventory for the current year is $12,000.
Average net accounts receivable for the current year is $32,000.
There are 40,000 shares of common stock outstanding.
Total dividends paid during the current year were $60,000.
The market price per share of common stock is $25.
What is the company's rate of return on common stockholder's equity for the current year?

Quizplus · Accepted Answer

First, we need to calculate the average total stockholder's equity:

Average stockholder's equity = (Beginning stockholder's equity + Ending stockholder's equity) / 2
= (($300,000 + $400,000) / 2)
= $350,000

Next, we need to calculate the net income:

Net income = Total revenue - Total expenses
= $900,000 - $600,000
= $300,000

Now we can calculate the rate of return on common stockholder's equity:

Rate of return on common stockholder's equity = (Net income - Preferred dividends) / Average common stockholder's equity

First, we need to find the preferred dividends. The only information given about preferred dividends is that they were not paid during the current year, so preferred dividends = $0.

Next, we need to find the average common stockholder's equity:

Average common stockholder's equity = (Beginning common stockholder's equity + Ending common stockholder's equity) / 2
= (($450,000 + $500,000) / 2)
= $475,000

Now we can calculate the rate of return on common stockholder's equity:

Rate of return on common stockholder's equity = ($300,000 - $0) / $475,000
= 0.6316 or 63.16%

Therefore, the company's rate of return on common stockholder's equity for the current year is 63.16%. The best choice is B.

The Hummel Corporation Reported the Following Income Statement and Balance