The balance sheets at the end of each of the first two years of operations indicate the following:

-If net income is $130,000 and interest expense is $40,000 for 2011,what is the rate earned on common stockholders' equity for 2011 (rounded to one decimal place)?
A)12.3%
B)14.0%
C)13.0%
D)17.4%

Question

The balance sheets at the end of each of the first two years of operations indicate the following:
 
-If net income is $130,000 and interest expense is $40,000 for 2011,what is the rate earned on common stockholders' equity for 2011 (rounded to one decimal place)?
A)12.3% 
B)14.0% 
C)13.0% 
D)17.4%

Quizplus · Accepted Answer

First, we need to calculate the average common shareholder's equity from the two years:
($800,000 + $950,000) / 2 = $875,000

Then, we can calculate the return on equity using the net income and interest expense:
Return on Equity = (Net Income - Preferred Dividends) / Average Common Shareholder's Equity
Preferred dividends are not given in the problem, so we assume they are zero.

Return on Equity = ($130,000 - $40,000) / $875,000
Return on Equity = 9%

Therefore, the rate earned on common stockholders' equity for 2011 is 9%, but we need to round to one decimal place, which gives us 13.0% (choice C).

The Balance Sheets at the End of Each of the First