When a company has both common and preferred stock, its ROE must be adjusted by ______. (Select all that apply.)Multiple select question.subtracting preferred stock dividends from net incomesubtracting the preferred stock balance from total stockholders' equityadding the preferred stock balance to total stockholders' equityadding the preferred stock dividends to net income
Question
When a company has both common and preferred stock, its ROE must be adjusted by ______. (Select all that apply.)Multiple select question.subtracting preferred stock dividends from net incomesubtracting the preferred stock balance from total stockholders' equityadding the preferred stock balance to total stockholders' equityadding the preferred stock dividends to net income
Solution
The correct steps to adjust Return on Equity (ROE) when a company has both common and preferred stock are:
- Subtracting preferred stock dividends from net income
- Subtracting the preferred stock balance from total stockholders' equity
These adjustments are necessary to ensure that the ROE calculation accurately reflects the return on equity available to common stockholders. Preferred stock dividends are subtracted from net income because these are not available to common stockholders. Similarly, the preferred stock balance is subtracted from total stockholders' equity because this equity is not available to common stockholders.
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