Question

Comparative balance sheets for Softech Canvas Goods for 2018 and 2017 are shown below. Softech pays no dividends and instead reinvests all earnings for future growth.

Required:

1. Determine the return on shareholders’ equity for 2018.

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2. What does the ratio measure?

Answer 1

Return on common stockholders’ equity ratio

This ratio measures the earning power of a company as well as the profitability of stockholder’s investment. The return on common stockholder’s equity is calculated by dividing the net income with the average common stockholder’s equity.

1.

Compute the rate of return on common stockholders’ equity for the Company M for the year 2018.

Step 1: Compute average stockholders’ equity.

Step 2: Compute return on stockholders’ equity.

2.

Explanation:

• This ratio quantifies the earning capacity of the company.

• This ratio also measures the profitability of the investment made by stockholders.