Quantitative Reasoning Problem 2 ACC 122 Assignment is to be completed as a Word
ID: 2411583 • Letter: Q
Question
Quantitative Reasoning Problem 2
ACC 122
Assignment is to be completed as a Word Document, PDF, or on notebook paper and submitted through Moodle
The table below contains letters a, b, c, d.
2018
2017
Average common stockholder equity
$1,800,000
$1,900,000
Dividends paid to common shareholders
90,000
70,000
Dividends paid to preferred shareholders
20,000
20,000
Net Income
290,000
248,000
Market Price of common stock
$20
$25
Weighted average number of shares common stock outstanding
150,000
180,000
Earnings per share
(a)
(b)
Return on common stockholders equity
(c)
(d)
Tell what these formulas are used for : Earnings per share; Return on common stockholder equity
Show all your computations or calculations for each of the letters (a), (b), (c ) (d)
Provide a sentence of explanation for each answer telling why you did what you did
2018
2017
Average common stockholder equity
$1,800,000
$1,900,000
Dividends paid to common shareholders
90,000
70,000
Dividends paid to preferred shareholders
20,000
20,000
Net Income
290,000
248,000
Market Price of common stock
$20
$25
Weighted average number of shares common stock outstanding
150,000
180,000
Earnings per share
(a)
(b)
Return on common stockholders equity
(c)
(d)
Explanation / Answer
Answers
Earnings per share (or EPS) = [ Net Income (-) Preferred Stock dividend ] / Weighted Average no. of common stock outstanding.
Working
2018
2019
A
Net Income
$ 2,90,000.00
$ 2,48,000.00
B
Dividend paid to preferred stocks
$ 20,000.00
$ 20,000.00
C = A - B
Net Income available to common stockholders
$ 2,70,000.00
$ 2,28,000.00
D
Weighted Average no. of shares common stock outstanding
150000
180000
E = C / D
Earnings per share
$ 1.80 [Answer (a)]
$ 1.27 [Answer (b)]
---Earning per share refers to amount that common stockholder’s are earning ‘per share of common stock’. That’s why Preferred Stock dividend is ‘deducted’ from Net Income, because that part does not constitute as ‘earnings for common stock’.
---EPS is the amount that common stockholder’s have earned ‘over a period of time’ on one share. Hence, weighted average number of stock outstanding during the year is considered.
Return on Common Stockholder’s Equity = Net Income (-) Preferred Stock dividend ] / Average common stockholder Equity
Working
2018
2019
A
Net Income
$ 2,90,000.00
$ 2,48,000.00
B
Dividend paid to preferred stocks
$ 20,000.00
$ 20,000.00
C = A - B
Net Income available to common stockholders
$ 2,70,000.00
$ 2,28,000.00
D
Average Common Stockholder Equity
$ 18,00,000.00
$ 19,00,000.00
E = (C / D ) x 100
Return on Common Stockholders’ Equity
15% [Answer (c)]
12% [Answer (d)]
---Return on SH Equity refers to the earning rate for common stock shares and what common stockholder’s have been earning on their equity.
Working
2018
2019
A
Net Income
$ 2,90,000.00
$ 2,48,000.00
B
Dividend paid to preferred stocks
$ 20,000.00
$ 20,000.00
C = A - B
Net Income available to common stockholders
$ 2,70,000.00
$ 2,28,000.00
D
Weighted Average no. of shares common stock outstanding
150000
180000
E = C / D
Earnings per share
$ 1.80 [Answer (a)]
$ 1.27 [Answer (b)]