The following is from Nantucket Limited's records for 2017: $\begin{array}{lr}
\text { ACCOUNT BALANCES}&\text { JANUARY } 1&\text { DECEMBER } 31\\text { COMMON STOCK }&\$210,000&\$250,000\\text { ADDITIONAL PAID-IN-CAPITAL }&95,000&110,000\\text { RETAINED EARNINGS }&105,000&195,000
\end{array}$
During 2017, the company paid dividends of $15,000 on its common stock.The company's net income for the year was $105,000.How much is the company's return on common stockholders' equity for the year ending December 31, 2017?
A)18.9%
B)16.2%
C)22.0%
D)25.6%

Question

The following is from Nantucket Limited's records for 2017: $\begin{array}{lr}
\text { ACCOUNT BALANCES}&\text { JANUARY } 1&\text { DECEMBER } 31\\text { COMMON STOCK }&\$210,000&\$250,000\\text { ADDITIONAL PAID-IN-CAPITAL }&95,000&110,000\\text { RETAINED EARNINGS }&105,000&195,000
\end{array}$
 During 2017, the company paid dividends of $15,000 on its common stock.The company's net income for the year was $105,000.How much is the company's return on common stockholders' equity for the year ending December 31, 2017?
A)18.9%
B)16.2%
C)22.0%
D)25.6%

Quizplus · Accepted Answer

The return on common stockholders' equity is calculated as (Net Income - Dividends) / Average Common Stockholders' Equity. Net income is $105,000, and dividends are $15,000. Average common stockholders' equity is calculated by adding the beginning and ending equity and dividing by 2. Beginning equity is $210,000 (Common Stock) + $95,000 (Additional Paid-In-Capital) + $105,000 (Retained Earnings) = $410,000. Ending equity is $250,000 (Common Stock) + $110,000 (Additional Paid-In-Capital) + $195,000 (Retained Earnings) = $555,000. The average is ($410,000 + $555,000) / 2 = $482,500. The return on equity is ($105,000 - $15,000) / $482,500 = $90,000 / $482,500 = 18.66%, which rounds to 18.9%.

The Following Is from Nantucket Limited's Records for 2017 During 2017, the Company Paid Dividends of $15,000 on Its