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Return on Equity (ROE)

The return on equity (ROE) ratio is calculated by dividing net income after interest and taxes by average shareholder’s equity. We use net income because it gives us an idea about how much income the firm makes after it pays out what is owed to debt holders. What is left over is kept for the firm’s shareholders. It is important to know how much income is kept for the firm’s shareholders in relation to the amount that those shareholders have invested in the firm.

As a result, the difference between a firms return on assets and return on equity is due to the amount of leverage of the firm. We know that return on assets can also be found as a function of the firm’s profit margin and its asset turnover. As a result, the firm’s return on equity can be found as a function of the firm’s return on assets and its equity multiplier.

The intuition from these formulas is that a firm can increase its return on equity by increasing its return on assets or by increasing its equity multiplier. It can increase its return on assets by increasing its profit margin or its asset turnover. It can increase its equity multiplier and its asset turnover by reducing the amount of assets it uses. It can also increase its equity multiplier by reducing shareholder’s equity.  

Adding debt and effect on ROE

a-If a firm's ROE is low and management wants to improve it, can adding more debt help improve the ROE? What might be some advantages and disadvantages of adding debt to the capital structure? b-Give some examples that illustrate how seasonal factors might distort a comparative ratio analysis.

The solution gives detailed steps on calculating a series of financial ratios from the income statement: liquidity ratios, efficiency ratios, asset turnover ratios, leverage ratios, coverage ratios, profitability ratios, component ratios and ROE. All formula and calculations are shown and explained in steps.

Modern Appliances Corporation has reported its financial results for the year ended December 31, 2011. Modern Appliances Corporation Income Statement for the Fiscal Year Ended December 31, 2011 Net sales ............................................................ $5,398,412,000 Cost of goods sold ..........................

Brand Equity from Consumer Standpoint

I need a research paper on brand equity on a consumers standpoint featuring a famous person. The paper has to be 2 pages long. It should entail how the brand evolved over time and how its changed over time. The second part of the paper should explain a celebrity that will endorse the brand and why they will beconnected to the br

Return on Equity and Leverage

As EBIT drops, the return on equity (ROE) of a levered firm drops, 1-the same as 2-relatively more than 3- relatively less than 4-more or less than (it cannot be determined) the ROE of an otherwise identical unlevered firm.

Princeton Equity, Langford Sweets.

Division B has a larger profit margin per dollar. 1. Princeton Corporation has assets of $384,000, current liabilities of $54,000, and long-term liabilities of $79,000. There is $36,800 in preferred stock outstanding; 20,000 shares of common stock have been issued. (a) Compute book value (net worth) per share. (Round your answ

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: . 10

Equity and Rate of Return

Southern Healthcare and BestWell are for-profit HMOs that operate in Florida and Georgia. Currently, both are identical in every respect except that Southern is unleveraged while BestWell has $10 million of 5 percent bonds. Both HMOs report an EBIT of $2 million and pay corporate tax at a rate of 40 percent. The cost of equity

Asset Turnover, ROE, Ethical issues, highly leveraged

A. Fixed assets total............100,000 Accum depr total.............(50,000) Net Assets....................50,000 (assume this is the average assets) Net Sales.....................100,000 1. What is the Asset Turnover Ratio of this firm? 2. If you were buying this company would you perceive this to be good or bad? 3

Financial Accounting: Pacific Capital Bank

Pacific Capital Bank is looking at using the return on equity model and the DuPont formula to measure the performance of certain capital investments. - The Return on Equity looks at net income after tax in relationship to shareholder equity. - The DuPont formula looks at net profit margin in relationship to total asset turnove

Calculating ROE Using DuPont Method for Yahoo and Google

Using the annual report information available on each of the company's websites: compute the ROE for Yahoo and Google. Please use the DuPont Method =(Net Profit Margin) x (Asset Turnover) x (Equity Multiplier) for Year End 2010 for each company. Please show calculations.

Determination of change in Return on Equity (ROE)

. Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to

What is a company's "ROE" and "IRR "and how do you calculate it?

When you measure how much earnings a company generates from its assets, Return on Equity (ROE) is an investor's gauge of that company and its ability to create profit generating efficiencies. Investors can gather information from the ROE that determines if the company being assessed is a profit making entity or a bad investment.

Normal EPS for GE based on the method of average ROE

see attached Refer to the following data to answer the following questions below. GEN ELECTRIC CO - Report History General 12mos(2) 2006 2005 2004 2003 2002 2001 Total Revenues, $M: NA 163391.0 148019.0 151300.0 132890.0 130685.0 125679.0 Depreciation & Amort, $M: NA 9158.0 8538.0 8385.0 6956.0 5998.0

What is the rate of return on common stock equity for 2011?

The following data are provided: December 31 2011 2010 Cash $ 375,000 $ 250,000 Accounts receivable (net) 400,000 300,000 Inventories 650,000 550,000 Plant assets (net) 2,000,000 1,625,000 Accounts payable 275,000 200,000 Taxes payable 50,000 25,000 Bonds payable 350,000 350,000 10% Prefe

Its current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm's book value will grow by 10 percent per year indefinitely, and the cost of equity is 15 percent. Given these facts, what is the market's expectation of the firm's long-term average ROE? .

a. Manufactured Earnings is a â??darlingâ? of Wall Street analysts. Its current market price is $15 per share, and its book value is $5 per share. Analysts forecast that the firm's book value will grow by 10 percent per year indefinitely, and the cost of equity is 15 percent. Given these facts, what is the market's expectat

The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price on the stock. The company and its investment banks believe that the proper procedure is to select several similar firms with publicity traded common stock and to make relevant comparisons. Several jewelry manufactures are reasonably similar to Edelman with respect to product mix, asset composition, and debt/equity proportions. Of these companies Kennedy Jewelers and Strasburg Fashions are most similar. When analyzing the following data, assume that 2002 and 2007 were reasonably "normal" years for all three companies-that is, these years were neither especially good nor especially bad in terms of sales, earnings, and dividends. At the time of the analysis, rRF was 8%and RPm was 4%. Kennedy is listed on the AMEX and Strasburg on the NYSE, while Edelman will be traded in the Nasdaq market. Kennedy Strasburg Edelman (total). Earning per Share 2007 $4.50 $7.50 $1,200,000 2008 3.00 3.50 816,000 Price per Share 2007 $36.00 $65.00 -------- Dividends per Share 2007 $2.25 $3.75 $ 600,000 2002 1.50 2.75 420,000 Book Value per Share,2007 $30.00 $55.00 $9. million Market/book ratio 2007 120% 118% ------ Total assets, 2007 $28. million $82. million $20 million Total debt, 2007 $121. million $30. million $11 million Sales 2007 $41. million $140 million $37 million The data are on a per share basis for Kenned and Strasburg, but are totals for Edelman. A- Assume that /Edelman has 100 shares of stock outstanding. Use this information to calculate earnings per share (EPS), dividends per share (DPS), and book value per share for Edelman. (hint: Edelman's 2007 EPS = $12,000). B- Calculate earnings and dividends growth rates for the three companies. (Hint: Edelman's EPS growth rate is 8%) C- On the basis of your answer to part a, do you think Edelman's stock would sell at a price in the same "ballpark" as that of Kennedy and Strasburg, that is, in the range of $25 to $100 per share?. D- Assuming that Edelman's management can split the stock so that the 100 shares could be changed to 1,000 shares, 100,000 shares, or any other number, would such an action make sense in this case? Why or why not?. E- Now assume tha Edelman did split its stock and has 400,000 shares. Calculate new values for EPS, DPS, and book value per share. (Hint: Edelman's new 2007 EPS is $3.00) F- Return on equity (ROE) can be measured as EPS/book value per hare or as total earnings/total equity. Calculate ROEs for the three companies for 2007. (Hint: Edelman's 2007 ROE is 13.3%). G- Calculate dividend payout ratios for the three companies for both years. (Hint: Edelman's 2007 payout ratio is 50%). H- Calculate debt/total assets ratios for the three companies for 2007. (Hint: Edelman's 2007 debt ratio 55%). I- Calculate the P/E ratios for Kennedy and Strasburg for 2007. Are these P/Es reasonable in view of relative growth, payout, and ROE data?. If not what other factors might explain them? (Hint: Kennedy's P/E = 8x.) J- Now determine a range of values for Edelman's stock price, with 400,000 shares outstanding, by applying Kennedy's and Strasburg's P/E ratios, price/dividends ratios, and price/book value ratios to your data for Edelman. For example, one possible price for Edelman' stock is (P/E Kennedy)(EPS Edelman) = 8($3) = $24 per share. Similar calculations would produce a range of prices based on both Kennedy's and Strasburg's data (Hint: range was $24 to $27.) K- Using the equation rS =D1/Po + g, find approximate rS values for Kennedy and Strasburg. Then use these values in the constant growth stock price model to find a price for Edelman's stock. (Hint: We averaged the EPS and DPS g's for Edelman.) L- At what price do you think Edelman's shares should be offered to the public? You will want to select a price that will be low enough to induce investors to bu the stock but not so low that it will rise sharply immediately after it is issued. Think about relative growth rates, ROEs, dividend yields, and total returns (rS = D1/P0 + g)

The Edelman Gem Company, a small jewelry manufacturer, has been successful and has enjoyed a good growth trend. Now Edelman is planning to go public with an issue of common stock, and it faces the problem of setting an appropriate price on the stock. The company and its investment banks believe that the proper procedure is to

Debt versus equity

Discuss how a company decides on its debt versus equity structure. If you do not have an example from work, provide an example from your personal experiences (such as a company you have invested in or even how a family can make this decision for an individual household.)

Ratio Analysis

Which company would you expect to have the higher debt to equity ratio, a financial institution or a high technology company? Why? Which company would you expect to have a higher profit margin, an appliance manufacturer or a grocer? Why? Which company would you expect to have a higher price to earnings ratio, General Motor

ROE and Net income

1. A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are$100 million and it has total assets of $50 million. What is its ROE? 2. Ebersoll mining has $6 million in sales; its ROE is 12%; and its total assetsturnover is 3.2x. The company is 50% equity financed. What is its net income?


Last year Ann Arbor Corp had $160,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost

Hamdi Corporation Return on Equity

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $420,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume th