Question

Ferman Corporation had net income of $160,000 and paid dividends of $50,000 to common stockholders and $20,000 to preferred stockholders in 2014. Ferman Corporation's common stockholders' equity at the beginning and end of 2014 was $870,000 and $1,130,000, respectively. Ferman Corporation's return on common stockholders' equity wasa. 16%.b. 14%.c. 11%.d. 9%.

Answer 1

Answer: Option (b) is correct.

Explanation:

Given that,

Net income = $160,000

Dividend paid to common stockholder = $50,000

Dividend paid to preferred stockholders = $20,000

common stockholders' equity at the beginning = $870,000

common stockholders' equity at the end = $1,130,000

$Average\ common\ stockholders\ equity=\frac{Beginning\ Balance + Ending\ Balance}{2}$

$Average\ common\ stockholders\ equity=\frac{870,000 + 1,130,000}{2}$

                                                                         $=\frac{2,000,000}{2}$

                                                                                = 1,000,000

$Return\ on\ common\ stockholders\ equity=\frac{Net\ income-preferred\ dividend}{Average\ common\ stockholders\ equity}$

$Return\ on\ common\ stockholders\ equity=\frac{160,000-20,000}{1,000,000\ equity}$

                                              = 14%