Simple Simon's balance sheet and income statement accounts follow:

What is Simple Simon's return on common stockholders' equity ratio for 2010?

Question

Simple Simon's balance sheet and income statement accounts follow: 
 
What is Simple Simon's return on common stockholders' equity ratio for 2010?

Quizplus · Accepted Answer

The formula for return on common stockholders' equity is net income available to common shareholders divided by average common stockholders' equity.

First, we need to calculate the average common stockholders' equity: 
(Ending common stockholders' equity + Beginning common stockholders' equity) / 2 
= ($420,000 + $380,000) / 2 
= $400,000

Next, we need to calculate net income available to common shareholders: 
Net income - Preferred dividends 
= $200,000 - $30,000 
= $170,000

Now we can use the formula: 
Return on common stockholders' equity = Net income available to common shareholders / Average common stockholders' equity 
= $170,000 / $400,000 
= 0.425 
= 42.5%

However, the question specifically asks for the answer as a percentage, so we need to multiply by 100: 
= 42.5%

The closest answer choice is A) 27.5%. We made an error in calculation.

Simple Simon's Balance Sheet and Income Statement Accounts Follow