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.
2022
Net income $195,000
Dividends on preferred stock 31,000
Dividends on common stock 21,000
Common stockholders’ equity beginning of year 599,000
Common stockholders’ equity end of year 665,000
2021
Net income $210,000
Dividends on preferred stock 31,000
Dividends on common stock 24,000
Common stockholders’ equity beginning of year 665,000
Common stockholders’ equity end of year 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 is calculated by subtracting the dividends paid out to preferred shareholders from the net income and then dividing that number by the beginning common stockholders' equity.
2021 Return on common stockholders' equity = (Net Income - Preferred dividends) / Common stockholders' equity beginning of year
= ($210,000 - $31,000) / $665,000
= 23.8%
2022 Return on common stockholders' equity = (Net Income - Preferred dividends) / Common stockholders' equity beginning of year
= ($195,000 - $31,000) / $599,000
= 21.7%
2021 Return on common stockholders' equity is calculated by subtracting the dividends paid out to preferred shareholders from the net income and then dividing that number by the beginning common stockholders' equity. In this case, it would be ($210,000 - $31,000) / $665,000 = 23.8%.
2022 Return on common stockholders' equity is calculated in a similar manner as 2021; however, we need to use the updated figures for 2022. Thus, it would be ($195,000 - $31,000) / $599,000 = 21.7%.