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Chapter 13: 38E (page 717)

Computing rate of return on common stockholders鈥� equity

LaSalle Exploration Company reported these figures for 2018 and 2017:

2018 2017

Income Statement鈥攑artial:

Net Income \( 14,800 \) 19,200

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet鈥攑artial:

Total Assets \( 323,000 \) 314,000

Preferred Stock \( 2,100 \) 2,100

Common Stock 178,000 168,000

Retained Earnings 11,000 7,000

Total Stockholders鈥� Equity \( 191,100 \) 177,100

Compute rate of return on common stockholders鈥� equity for 2018 assuming no dividends were declared or paid to preferred stockholders

Short Answer

Expert verified

Rate of return on common stockholders鈥� equity for 2018 is 8.55%

Step by step solution

01

Basic Introduction-

Return on common stockholders' equity estimates the success of a corporation in generating revenue for the benefit of common stockholders.

02

Calculation of rate of return on common stockholder’s equity

Rate of return on common stockholders鈥� equity

Net Income

$ 14,800

Preferred dividends

0

a.

$ 14,800

b. Average common equity

$173,000

(a/b)* 100

8.55%

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Most popular questions from this chapter

List three characteristics of a corporation.

Journalizing a stock dividend and reporting stockholders鈥� equity

The stockholders鈥� equity of Lakeside Occupational Therapy, Inc. on December 31, 2017, follows:

Common Stock鈥擻(1 Par Value; 1,200 shares

authorized, 400 shares issued and outstanding

Paid-In Capital:

120,000

400

2,000

Retained Earnings

Total Stockholders鈥� Equity \) 122,000

Stockholders鈥� Equity

Paid-In Capital in Excess of Par鈥擟ommon 1,600

Total Paid-In Capital

\(

On April 30, 2018, the market price of Lakeside鈥檚 common stock was \)16 per share and the company declared a 13% stock dividend. The stock was distributed on May 15.

Requirements

1. Journalize the declaration and distribution of the stock dividend.

2. Prepare the stockholders鈥� equity section of the balance sheet as of May 31, 2018. Assume Retained Earnings are $120,000 on April 30, 2018, before the stock dividend, and the only change made to Retained Earnings before preparing the balance sheet was closing the Stock Dividends account.

What is the effect on the accounting equation when cash dividends are declared?

What is the effect on the accounting equation when cash dividends are paid?

What does the rate of return on common stock show, and how is it calculated?

Computing earnings per share and price/earnings ratio

Rocket Corp. earned net income of \(153,040 and paid the minimum dividend to preferred stockholders for 2018. Assume that there are no changes in common shares outstanding during 2018. Rocket鈥檚 books include the following figures:

Preferred Stock鈥�6%, \)60 par value; 2,000 shares authorized, 1,000

shares issued and outstanding \( 60,000

Common Stock鈥擻)5 par value; 80,000 shares authorized, 48,000 shares

issued, 46,700 shares outstanding 240,000

Paid-In Capital in Excess of Par鈥擟ommon 470,000

Treasury Stock鈥擟ommon; 1,300 shares at cost (26,000)

Requirements

2. Assume Rocket鈥檚 market price of a share of common stock is $12 per share. Compute Rocket鈥檚 price/earnings ratio.
See all solutions

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