The shareholder's equity section of Killam Company contains the following accounts and amounts: $$\begin{array}{l}
\begin{array} { l r }
\text { Preferred shares } ^ { 1 } , 50,000 \text { outstanding } & \$ 1,250,000 \
\text { Common shares } ^ { 2 } , 1,000,000 \text { outstanding } & \$ 2,500,000 \
\text { Retained earnings } & \$ 3,500,000 \
\text { Net income } & \$ 875,000
\end{array}\
{ } ^ { 1 } \$ 100,000 \text { dividends paid; } { } ^ { 2 } \$ 500,000 \text { dividends paid }
\end{array}$$ What was Killam's return on equity closest too?
A)10.6%
B)12.0%
C)12.9%
D)14.5%

Question

The shareholder's equity section of Killam Company contains the following accounts and amounts: $$\begin{array}{l}
\begin{array} { l r } 
\text { Preferred shares } ^ { 1 } , 50,000 \text { outstanding } & \$ 1,250,000 \
\text { Common shares } ^ { 2 } , 1,000,000 \text { outstanding } & \$ 2,500,000 \
\text { Retained earnings } & \$ 3,500,000 \
\text { Net income } & \$ 875,000
\end{array}\
{ } ^ { 1 } \$ 100,000 \text { dividends paid; } { } ^ { 2 } \$ 500,000 \text { dividends paid }
\end{array}$$ What was Killam's return on equity closest too?
A)10.6%
B)12.0%
C)12.9%
D)14.5%

Quizplus · Accepted Answer

Return on Equity (ROE) is calculated as Net Income divided by Shareholder's Equity. Here, Net Income is $875,000. Shareholder's Equity is the sum of Preferred Shares ($1,250,000), Common Shares ($2,500,000), and Retained Earnings ($3,500,000), which totals $7,250,000. Thus, ROE = $875,000 / $7,250,000 = 0.1207 or 12.07%, which is closest to 12.9%.

The Shareholder's Equity Section of Killam Company Contains the Following