The balance sheets at the end of each of the first two years of operations indicate the following: If net income is $115,000 and interest expense is $30,000 for 2012, what is the rate earned on stockholders' equity for 2012 (round percent to one decimal point)?
A) 10.6%
B) 11.1%
C) 12.4%
D) 14.0%

Question

The balance sheets at the end of each of the first two years of operations indicate the following:  If net income is $115,000 and interest expense is $30,000 for 2012, what is the rate earned on stockholders' equity for 2012 (round percent to one decimal point)?
A) 10.6% 
B) 11.1% 
C) 12.4% 
D) 14.0%

Quizplus · Accepted Answer

The rate earned on stockholders' equity is calculated by dividing net income minus preferred dividends by average stockholders' equity. The preferred dividends for 2012 are not given in the problem, so we assume they are 0. The average stockholders' equity for 2012 is [(500,000 + 700,000)/2] = 600,000. Therefore, the rate earned on stockholders' equity for 2012 is [(115,000-30,000)/600,000] = 11.1%.

The Balance Sheets at the End of Each of the First