The average stockholders' equity for Holloway Co.last year was $2,000,000.Included in this figure was $200,000 par value of 8% preferred stock.If the return on common stockholders' equity was 12.5% for the year, net income was
A) $225,000.
B) $250,000.
C) $241,000.
D) $234,000.

Question

Quizplus · Accepted Answer

$241,000
$225,000 + $16,000* = Net Income
 
0.125 = (Net income - $16,000) / ($2,000,000 - $200,000)
0.125 × $1,800,000 = Net Income - $16,000
 
*$16,000 = Preferred Dividend ($200,000 × 8%)

The Average Stockholders' Equity for Holloway Co