Ferman Corporation had net income of $140,000 and paid dividends of $40,000 to common stockholders and $20,000 to preferred stockholders in 2017. Ferman Corporation's common stockholders' equity at the beginning and end of 2017 was $870,000 and $1,130,000, respectively. Ferman Corporation's return on common stockholders' equity was
A)14%.
B)12%.
C)9%.
D)8%.

Question

Quizplus · Accepted Answer

Return on common stockholders' equity = (Net Income - Preferred Stock Dividends) / Average Common Stockholders' Equity
= ($140,000 - $40,000) / (($870,000 + $1,130,000) / 2)
= $100,000 / $1,000,000
= 0.1 or 10%
Therefore, the return on common stockholders' equity for Ferman Corporation was 12% (not one of the choices given), which means that the closest answer choice is B, 12%.

Ferman Corporation Had Net Income of $140,000 and Paid Dividends