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Return on Common Stockholder's Equity - YouTube
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we are going to calculate the return on
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common stockholders equity so here's the
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facts KT Inc reported net income of 186
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thousand during 2014 and paid dividends
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of 26,000 a common stock
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it also has ten thousand shares of six
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percent $100 par value non-cumulative
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preferred stock outstanding and common
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stockholders equity was a million two
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hundred thousand On January 1 2014 and a
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million six hundred thousand on December
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31st 2014 so the return on common
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stockholders equity a formula is net
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income minus preferred dividends divided
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by average common stockholders equity so
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let's just begin to fill out these
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pieces so net income is 186,000 now
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we've got to calculate preferred
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dividends they preferred dividends would
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be ten thousand times six percent times
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100 par value so I'll write that all out
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here ten thousand times six percent
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times a hundred dollars okay now one
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thing to remember is this is
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non-cumulative and since we paid common
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stock dividends of twenty six that means
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we must have declared dividends for the
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preferred stock because common wouldn't
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that prefer it always gets dividends
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first so we don't know the total well
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actually we do know the total amount of
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dividends because ten thousand times
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0.08 times 100 equals 60,000 so the
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total dividends that we would have
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declared would be sixty plus the twenty
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six and so but if we had not declared
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any dividends
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and not paid any too common then you
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wouldn't subtract out the 60000 because
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the non-cumulative nature of the stock
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means that if we don't declare dividends
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then they're never going to the
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preferred shareholders they're never
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going to get those so then this
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numerator is what of the net income is
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available to common shareholders well if
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we don't declare dividends then that net
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income will always be available to the
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common shareholders but once we do
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declare dividends then we have to
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subtract that the preferred if this have
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been cumulative preferred stock and we
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had not declared dividends we would
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still subtract out the preferred
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dividends because they will get their
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dividends sometime not this year but
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maybe next year or the next year and so
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whatever those dividends are since its
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cumulative they're never available to
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common shareholders the denominator
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average common stockholders equity is
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calculated by taking the equity at the
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beginning of the year plus the equity at
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the end of the year and divided divided
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by two so we end up with in our
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numerator 186 minus 60 126 thousand
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divided by a million four hundred
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thousand equals 0.09 or we would say a
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nine percent return on equity
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