The calculation of Rate of Return on Common Shareholders' Equity (ROCE) is as follows: Rate of Return on Common = Shareholders' Equity
A)$\frac{\text {Net Income - Dividends on Preferred Stock }}{\text {Ending Common Shareholders' Equity }}$
B) $\frac{\text { Net Income}}{\text { Average Common Shareholders' Equity}}$
C) $\frac{\text { Net Income + Dividends on Preferred Stock}}{\text {Average Common Shareholders' Equity }}$
D)$\frac{\text {Net Income - Dividends on Preferred Stock }}{\text {Average Common Shareholders' Equity }}$
E) $\frac{\text {Net Income + Dividends on Preferred Stock }}{\text { Ending Common Shareholders' Equity}}$

Question

Quizplus · Accepted Answer

The correct formula for calculating the Rate of Return on Common Shareholders' Equity (ROCE) subtracts dividends on preferred stock from net income and divides the result by the average common shareholders' equity, not the ending equity. This adjustment ensures that the return calculated is specifically for common shareholders, excluding the impact of preferred dividends.