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How can the ROE and the ROI of companies be compared

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How is return on equity (ROE) defined and what is the importance of understanding the return on equity (ROE) as it applies to international financing? What would the strengths and weaknesses be?

How is internal rate of return (IRR) defined and what is the importance of understanding the internal rate of return (IRR) as it applies to international financing? What would the strengths and weaknesses be?

When selecting two companies from the same industry and using the most current annual report information available on the company's website how is the ROE computed for each?

When selecting the same two companies from the same industry and using the most current annual report information available on the company's website how is the ROI computed for each?

How can the ROE and the ROI of these companies be compared and described?

The objective is to understand the forces of globalization and its implications for the multinational firm and to recognize financial management decisions of multinational firms.

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Solution Summary

According to Kennon (2009), return on equity (ROE) is a financial profitability instrument that is used to show how much earnings (income) a firm generates as it relates to the sum of investor equity, based on the firms financial fact sheet. The firms' total assets, minus the firm's total liabilities equals shareholder equity (total assets - total liabilities = equity). Return on Equity (ROE) uses the company's net income and the shareholders' equity, to grant information on the administration's capacity to generate assets (wealth) for the shareholders (net profit / shareholder's equity = ROE). Therefore, this ratio is a fair indicator of how efficient the firm is administering and managing their finances, where the final goal is to generate income (wealth) for the investor (McClure, 2009). This tool seems to be of good value when evaluating overseas projects to invest in. One could argue that there is a direct relationship between a firm's capacity to generate equity and the investor's returns.

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Working Capital, ROE, ROI, Liquidity and Profitability

Case 3.18
LO 3, 4, 6, 7
Analysis of liquidity and profitability measures of Dell Inc. The following data (amounts in millions) are taken from the January 30, 2009, and February 1, 2008, comparative financial statements of Dell Inc., a direct marketer and distributor of personal computers (PCs) and PC-related products:

. 102

At February 2, 2007, total assets were $25,635 and total stockholders' equity was $4,328.
a. Calculate Dell, Inc.'s, working capital, current ratio, and acid-test ratio at January 30, 2009, and February 1, 2008. Round your ratio answers to two decimal places.
b. Calculate Dell's ROE for the years ended January 30, 2009, and February 1, 2008. Round your ratio answers to two decimal places, and your percentage answers to one decimal place.
c. Calculate Dell's ROI, showing margin and turnover, for the years ended January 30, 2009, and February 1, 2008. Round your ratio answers to two decimal places and your percentage answers to one decimal place.
d. Evaluate the company's overall liquidity and profitability.
e. Dell, Inc., did not declare or pay any dividends during the years ended January 30, 2009, or February 1, 2008. What do you suppose is the primary reason

Case 4.26
LO 6, 7
Capstone analytical review of Chapters 2-4. Calculate liquidity and profitability measures and explain various financial statement relationships for an excavation contractor Gerrard Construction Co. is an excavation contractor. The following summarized data (in thousands) are taken from the December 31, 2010, financial statements:

At December 31, 2009, total assets were $82,000 and total owners' equity was $32,600. There were no changes in notes payable or paid-in capital during 2010.
Required:
a. The cost of services provided amount includes all operating expenses (selling, general, and administrative expenses) except depreciation expense. What do you suppose the primary reason was for management to separate depreciation from other operating expenses? From a conceptual point of view, should depreciation be considered a "cost" of providing services? p. 145
b. Why do you suppose the amounts of depreciation expense and interest expense are so high for Gerrard Construction Co.? To which specific balance sheet accounts should a financial analyst relate these expenses?
c. Calculate the company's average income tax rate. (Hint: You must first determine the earnings before taxes.)
d. Explain why the amount of income tax expense is different from the amount of income taxes payable.
e. Calculate the amount of total current assets. Why do you suppose this amount is so low, relative to total assets?
f. Why doesn't the company have a Merchandise Inventory account?
g. Calculate the amount of working capital and the current ratio at December 31, 2010

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