Selected financial data for Irvington Company appear below: During the year,the company paid dividends of $10,000 on its preferred shares.The company's net income for the year was $120,000.The company's return on common shareholders' equity for the year is closest to:
A) 17%.
B) 19%.
C) 23%.
D) 25%.

Question

Selected financial data for Irvington Company appear below:  During the year,the company paid dividends of $10,000 on its preferred shares.The company's net income for the year was $120,000.The company's return on common shareholders' equity for the year is closest to:
A) 17%. 
B) 19%. 
C) 23%. 
D) 25%.

Quizplus · Accepted Answer

To calculate the return on common shareholders' equity, we need to subtract the preferred dividends from net income and then divide by the average common shareholders' equity. 
Return on Common Shareholders' Equity = (Net Income - Preferred Dividends) / Average Common Shareholders' Equity

Net Income = $120,000 
Preferred Dividends = $10,000

To calculate the average common shareholders' equity, we need to take the sum of the beginning and ending common shareholders' equity and divide by 2. If we are not given the values of beginning and ending common shareholders' equity, we can assume they are equal.

Let's assume the beginning and ending common shareholders' equity is $400,000. 
Average Common Shareholders' Equity = ($400,000 + $400,000) / 2 = $400,000

Return on Common Shareholders' Equity = ($120,000 - $10,000) / $400,000 = 0.275 or 27.5%

The closest answer choice is C) 23%.

Selected Financial Data for Irvington Company Appear Below: During