Selected financial data for Irvington Company appear below:
$\begin{array}{|l|r|r|}
\hline &{\text { Account Balances }} \
\hline & \text { Beginning of year } & \text { End d year } \
\hline \text { Preferred shares } & \$ 125,000 & \$ 125,000 \
\hline \text { Common shares } & 300,000 & 400,000 \
\hline \text { Retained earnings } & 75,000 & 185,000 \
\hline
\end{array}$
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 was closest to which of the following?
A) 17%.
B) 19%.
C) 23%.
D) 25%.

Question

Quizplus · Accepted Answer

The return on common shareholders' equity (ROE) is calculated as Net Income - Preferred Dividends / Average Common Shareholders' Equity. Here, Net Income is $120,000, Preferred Dividends are $10,000, and the Average Common Shareholders' Equity is calculated as the average of beginning and end common shares plus retained earnings minus preferred shares (since they don't change, they are not included in the average calculation). So, the calculation is as follows: Average Common Equity = [(300,000 + 75,000) + (400,000 + 185,000)] / 2 - 125,000 (since preferred shares are constant, they are subtracted from the total equity to get common equity). This simplifies to (375,000 + 585,000) / 2 = 480,000 average common equity. Thus, ROE = (120,000 - 10,000) / 480,000 = 110,000 / 480,000 = 22.92%, which rounds to approximately 23%.

Selected Financial Data for Irvington Company Appear Below During the Year,the Company Paid Dividends of $10,000 on Its