When calculating the return on common equity ratio, dividends to preferred stockholders are deducted from net income because
A)the ratio is an indicator of the return on common stockholders equity rather than the return on total equity.
B)dividends are not expenses on the current period income statement.
C)conservatism indicates that stockholders prefer a smaller numerator.
D)dividends are only available for distribution to common stockholders after the preferred stockholders have received their dividends.

Question

Quizplus · Accepted Answer

The return on common equity ratio measures the return specifically attributable to common stockholders, so preferred dividends are deducted to reflect only the income available to common shareholders.

When Calculating the Return on Common Equity Ratio, Dividends to Preferred