A company had a return on common stockholders' equity of 25%.Net income equaled $200,000 and average common stockholders' equity equaled $700,000.Compute the amount of the preferred dividends declared.
A)$200,000
B)$500,000
C)$50,000
D)$25,000
E)$175,000

Question

Quizplus · Accepted Answer

First, we need to calculate the common stockholders' equity based on the given return on common stockholders' equity of 25%.

Return on Common Stockholders' Equity = Net Income / Average Common Stockholders' Equity
0.25 = $200,000 / Average Common Stockholders' Equity
Average Common Stockholders' Equity = $800,000

We know that the total stockholders' equity includes preferred stockholders' equity as well. Let's assume the amount of preferred stockholders' equity as X.

Total Stockholders' Equity = Common Stockholders' Equity + Preferred Stockholders' Equity
Total Stockholders' Equity = $800,000 + X

Let's assume the amount of preferred dividends declared as Y.

Net Income = Preferred Dividends Declared + Common Dividends Declared
$200,000 = Y + (Total Dividends - Y)
$200,000 = Y + Total Dividends - Y
$200,000 = Total Dividends

We can now find the amount of preferred dividends declared by subtracting the common dividends declared from the total dividends.

Common Dividends Declared = Common Stockholders' Equity * Return on Common Stockholders' Equity
Common Dividends Declared = $700,000 * 0.25
Common Dividends Declared = $175,000

Preferred Dividends Declared = Total Dividends - Common Dividends Declared
Preferred Dividends Declared = $200,000 - $175,000
Preferred Dividends Declared = $25,000

Therefore, the amount of preferred dividends declared is $25,000 (Option D).

A Company Had a Return on Common Stockholders' Equity of 25%.Net