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How can the ROE and the ROI of companies be compared

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.

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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