The return on common equity is calculated as the income available for common shareholders divided by the average common equity. The income available to common shareholders is only $30,000. This is because $5,000 of the $35,000 of income needs to be reserved for the cumulative preferred dividend. This is divided by the average common equity which includes the common shares, the additional paid in capital and the retained earnings. In total, this is $275,000 at the beginning of the year and $290,000 at the end of the year, for an average of $282,500. Dividing the income for common shareholders by the average common equity, we get 10.6% return on common equity.
This answer uses only the beginning common equity in the denominator, and not the average common equity.
This answer uses the entire net income in the numerator rather than the income available for common shareholders.
This answer includes the preferred equity in the denominator of the calculation, instead of common equity.
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Assuming that Lisa Inc.'s net income for 2010 was $35,000 and there were no preferred stock dividends in arrears, Lisa's return on common equity for 2010 was