To calculate the return on stockholders' equity and the return on common stockholders' equity, we can use the following formulas:
(a) Return on Stockholders' Equity (ROE): \[ \text{ROE} = \frac{\text{Net Income}}{\text{Average Stockholders' Equity}} \times 100 \]
Using the figures provided:
- Net Income = $215,000
- Average Stockholders' Equity = $1,569,343
\[ \text{ROE} = \frac{215,000}{1,569,343} \times 100 \approx 13.7% \]
(b) Return on Common Stockholders’ Equity: \[ \text{Return on Common Stockholders' Equity (ROCE)} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Average Common Stockholders' Equity}} \times 100 \]
Using the figures provided:
- Preferred Dividends = $8,600
- Average Common Stockholders' Equity = $1,053,061
First, calculate the net income available to common stockholders: \[ \text{Net Income} - \text{Preferred Dividends} = 215,000 - 8,600 = 206,400 \]
Now, substitute this value into the ROCE formula: \[ \text{ROCE} = \frac{206,400}{1,053,061} \times 100 \approx 19.6% \]
Now, rounding the percentages to one decimal place:
- a. Return on Stockholders' Equity: 13.7%
- b. Return on Common Stockholders’ Equity: 19.6%
So the final answers are:
a. Return on Stockholders' Equity: 13.7%
b. Return on Common Stockholders’ Equity: 19.6%
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