Use the following information for questions 93-95.
The following data are provided for Croatia Corp.'s last two fiscal years: Additional information:
On May 1, 2021, 6,000 common shares were issued. Although dividends had been declared regularly up to December 31, 2020, preferred dividends were NOT declared during 2021. The market price of the common shares was $ 100 at December 31, 2021.
-To the nearest percent, the rate of return on common shareholders' equity for 2021 is
A) 23%.
B) 22%.
C) 20%.
D) 18%.

Question

Use the following information for questions 93-95.
The following data are provided for Croatia Corp.'s last two fiscal years:  Additional information:
On May 1, 2021, 6,000 common shares were issued. Although dividends had been declared regularly up to December 31, 2020, preferred dividends were NOT declared during 2021. The market price of the common shares was $ 100 at December 31, 2021.
-To the nearest percent, the rate of return on common shareholders' equity for 2021 is
A) 23%. 
B) 22%. 
C) 20%. 
D) 18%.

Quizplus · Accepted Answer

To calculate the rate of return on common shareholders' equity, we need to divide the net income available to common shareholders by the average common shareholders' equity. The net income available to common shareholders can be calculated by subtracting the preferred dividends from the net income. As no preferred dividends were declared in 2021, the net income available to common shareholders is equal to the net income. The average common shareholders' equity can be calculated as the sum of common shareholders' equity at the beginning and end of the year divided by 2.

Net Income available to common shareholders (2021) = $14,000 - $0 = $14,000
Average Common Shareholders' Equity (2021) = ($52,000 + $92,000) / 2 = $72,000

Rate of Return on Common Shareholders' Equity (2021) = ($14,000 / $72,000) x 100% = 19.4%

Rounding to the nearest percent, the rate of return on common shareholders' equity for 2021 is 20%. Therefore, the best choice is C.

Use the Following Information for Questions 93-95