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# Compute ROE

Using Internet sources gather information on ROE and IRR. Post a two to three paragraph explanation for each of these terms and the advantages and disadvantages of using them when selecting projects to invest in overseas.

Select two companies from the same industry. Using the annual report information available on the company's website compute the ROE for each company. Suggested companies: IBM and Compaq. Thank you.

#### Solution Preview

Hi there,

Here is the information that you requested (note: I have included more than the requested 2-3 paragraphs requested, but I figured that more would be better to ensure that you had a complete understanding of the topic).

According to investopedia.com, Return on Equity is a measure of a corporation's profitability, and is calculated as: net income / shareholders equity.

Essentially, ROE reveals how much profit a company generates with the money shareholders have invested in it. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

There are several variations on the formula that investors may use:

1. Investors wishing to see the return on common equity may modify the formula above by subtracting preferred dividends from net income and subtracting preferred equity from shareholders' equity, giving the following: Return on Common Equity (ROCE) = Net Income - Preferred Dividends / Common Equity.

2. Return on equity may also be calculated by dividing net income by average shareholders' equity. Average shareholders' equity is calculated by adding the shareholders' equity at the beginning of a period to the shareholders' equity at period's end and dividing the result by two.

3. Investors may also calculate the change in ROE for a period, first by using shareholders' equity at the start of the period as the denominator and then using shareholders' equity at the end of the period as the denominator. Calculating both beginning and ending ROEs allows an investor to determine the ...

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