Understanding ROE, ROC and IRR with an example
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When expanding and investing in projects overseas it is essential to understand such things as return on equity (ROE) and internal rate of return. Using internet sources (you may want to start with the websites listed below) gather information on ROE and IRR. Post a two to three paragraph explanation 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. Using the annual report information available on the company's website compute the ROE for each company.
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Solution Summary
This solution contain detailed understanding of ROE, ROC and IRR with an example from the Industry to explain the concepts. The solution discuss the advantages and disadvantages of each and how we can interpret the values obtained.
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Return on Capital
The return on capital on a project measures the returns earned by the firm on it is total investment in the project. Consequently, it is a return to all claimholders in the firm on their collective investment in a project. It gives the relationship between operating income of the firm and capital invested. The capital invested is defined as the sum of the book value of debt and equity. When a substantial portion of the liabilities is either current (such as accounts payable) or non-interest bearing, this approach provides a better measure of the true return earned on capital employed in the business.
While this calculation is rather straightforward for a 1-year project, it becomes more involved for multi-year ...
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