Return on common stockholders’ equity
On January 1, 2022, Vaughn Corporation purchased 1,200 shares of treasury stock. Other information regarding Vaughn
Corporation is provided as follows.
2021
ITEM 2021, 2022
Net income $195,000 $210,000
Dividends on preferred stock 31,000 31,000
Dividends on common stock 21,000 24,000
Common stockholders’ equity beginning of year 599,000 665,000
Common stockholders’ equity end of year 665,000 743,000
(a) Compute return on common stockholders’ equity for each year. (Round answers to 1 decimal place, e.g. 10.5%.)
Sample Solution
2021 Return on Common Stockholders' Equity:
$195,000 - $31,000 - $21,000 / $599,000 = 28.1%
Explanation:
Return on common stockholders' equity is calculated by subtracting the dividends on preferred and common stock from net income divided by the beginning of year common stockholders' equity.
Therefore:
Return on Common Stockholders’ Equity = (Net Income - Dividends on Preferred Stock – Dividends on Common Stock) / Common Stockholder's Equity at the Beginning of Year
2022 Return on Common Stockholders’ Equity:
$210,000 - $31,000 – $24,000 / $665,0000 = 24.8%
Explanation:
Return on common stockholders' equity is calculated by subtracting the dividends on preferred and common stock from net income divided by the beginning of year common stockholder's equity.
Therefore:
Return on Common Stockholders’ Equity = (Net Income - Dividends on Preferred Stock – Dividends Treasury Stocks) / Common Stockholder's Equity at the Beginning of Year