Chapter 11, Problem 25Q

To determine

Return on assets: It is used to measure the overall earning ability of the company. Thus, it shows the relationship between the net income and the average total assets. The following is the formula to calculate the return on assets ratio:

$\text{Rate of return on assets}=\frac{\text{Net}\text{income}}{\text{Average total assets}}\times 100$

Return on common stockholders’ equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on common stockholders’ equity is as follows:

$\begin{array}{l}\text{Return on common}\\ \text{stockholders' equity}\end{array}\}=\frac{\text{Net income–Preferred dividends}}{\text{Average common stockholders' equity}}\times 100$

To explain: the circumstances under which the return on assets and the return on common stockholders’ equity will be equal.