A)Why is the rate earned on stockholders’ equity by a thriving business ordinarily higher than the rate earned on total assets? B)Should the rate earned on common stockholders’ equity normally be higher or lower than the rate earned on total stockholders’ equity? Briefly explain

a)Due to leverage, the rate on stockholders’ equity will often be greater than the rate on total assets. This occurs because the amount earned on assets acquired through the use of funds provided by creditors exceeds the interest charges paid to creditors.

b)Higher. The concept of leverage applies to preferred stock as well as debt. The rate earned on common stockholders’ equity ordinarily exceeds the rate earned on total stockholders’ equity because the amount earned on assets acquired through the use of funds provided by preferred stockholders normally exceeds the dividends paid to preferred stockholders.