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Greetings sir.
25.9 – Task 2
Please explain why are preference dividends deducted from the net income, before dividing by the value of ordinary shares $500,000 to calculate return on equity.
Thankyou
Preference dividends are always subtracted from the income in order to arrive at the amount available for ordinary shareholders.
We are told to calculate the return on equity. Do equity shareholders not include preference shareholders as well, that we subtract away the preference dividends ? Or is it because equity shareholders may include preference shareholders as well but the question only gives us information about ordinary shareholders in terms of equity, and therefore we need to remove away the preference dividends in order to compare like for like.
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