Q45PGA-3 - Horngren'S Financial And Managerial Accounting

Question

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity

Bianchi Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 34,380 \) 18,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 280,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares 

authorized, 12,000 shares issued and outstanding

\) 108,000 \( 108,000

Common Stock—\)2 Par Value; 60,000 shares 

authorized, 50,000 shares issued and outstanding

100,000 100,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 60,500 38,000

Total Stockholders’ Equity \( 282,500 \) 260,000

Requirements

3. Compute Bianchi Company’s rate of return on common stockholders’ equity for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest whole percent.

Step-by-Step Solution

Answer

Rate of return on common stockholders’ equity for 2018 of the company is 45%

Step 1: Return on equity definition

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

Step 2: Calculation of rate of return on common stockholder’s equity

Rate of return on common stockholders’ equity
Net Income	$34,380
Less: Preferred dividend	$11,800
a	$22,580
b. Weighted average outstanding shares	50,000
Rate of return on common stockholders’ equity(a/b) * 100	45%