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Net income is $248,000 and preferred dividends are $12,000. Average common stockholders' equity is $2,395,000. What is the return on common stockholders' equity (to one decimal percent)?
A9.9%
B10.4%
C9.7%
D5.0%
Answer & Solution
Correct answer: A. 9.9%
1. Ratio = (net income − preferred dividends) / average common stockholders' equity.
2. Preferred dividends are removed since they rank ahead of common holders.
3. = ($248,000 − $12,000) / $2,395,000 = $236,000 / $2,395,000.
4. = 0.0985 = 9.9%.
5. Trap: 10.4% (option B) fails to subtract preferred dividends from net income.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §7.3.4 "Return on Common Stockholders' Equity (ROE)", p.307_
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