Explore BrainMass

Global Financial Management

When expanding and investing in projects overseas as my company (BELL TECH, USA) has planned to, it is very important to understand such things as return on equity (ROE) and internal rate of return (IRR).

I need you to help me (you can use the websites listed below and other internet resources) gather information on ROE and IRR explaining each of these terms and the advantages and disadvantages of using them when selecting projects to invest in overseas.

- Return on Equity vs. Return on Capital:

- Return on Equity Definition:

- Keep Your Eye on the ROE:-

- IRR Example:-

Select two companies from the same industry.
Use the annual report information available on the company's websites and compute the ROE for each company.

Solution Preview

Return on equity means the amount of net income returned as a percentage of shareholders equity. The return on equity is important because it measures the corporation's profitability by revealing how much profit the company makes with the cash that the shareholders have put in. Usually this expressed as a percent and is calculated as the Return on Equity = Net Income divided by Shareholder's Equity. Why return on equity is important is because it helps measure the firm's efficiency at generating profits from every unit of shareholder's equity.

The return on equity is an important measure because the higher the return on equity, the firm is more likely to be one that is capable of generating cash internally. The higher the company's return on equity, compared to its industry, the better. The gain to the investor is that earnings reinvested in the company at a high return on equity rate which can give the company a high growth rate. The gain can also come as a dividend on the common shares or as a combination of dividends and reinvestment in the company.

The internal rate of return is the discount rate used in capital budgeting that makes the net present value of all cash flows from a specific project ...

Solution Summary

This answer provides you an excellent discussion on Global Financial Management