Question

On January 1, 2017, Vahsholtz Corporation purchased 5,000 shares of treasury stock. Other information regarding Vahsholtz Corporation is provided as follows. 2017 2016 Net income $110,000 $100,000 Dividends on preferred stock $30,000 $30,000 Dividends on common stock $25,000 $20,000 Weighted-average number of common shares outstanding 45,000 50,000 Common stockholders’ equity beginning of year $750,000 $600,000 Common stockholders’ equity end of year $830,000 $750,000 (a) Compute return on common stockholders’ equity for each year. (Round answers to 1 decimal place, e.g. 15.2.) 2016 2017 Return on common stockholders' equity

Answer 1

Answer:

2016 = 10.4%

2017 = 10.1%

Explanation:

The formula to compute the return on common stockholders’ equity is shown below:

= (Net income - preference dividend) ÷ (Average Common stockholders' equity)

For 2017

Net income is $110,000

Preference dividend = $30,000

And, the Average Common stockholders' equity would be

= (Opening Common stockholders' equity + Ending Common stockholders' equity) ÷ 2

= ($750,000 + $830,000) ÷ 2

= $790,000

Now put these values to the above formula  

So, the value would equal to

= ($110,000 - $30,000) ÷ ($790,000)

= 10.1%

For 2016

Net income is $100,000

Preference dividend = $30,000

And, the Average Common stockholders' equity would be

= (Opening Common stockholders' equity + Ending Common stockholders' equity) ÷ 2

= ($600,000 + $750,000) ÷ 2

= $675,000

Now put these values to the above formula  

So, the value would equal to

= ($100,000 - $30,000) ÷ ($675,000)

= 10.4%