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Finance Calculations: Expected ROE

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Question: You need $2 million of total assets to generate $3 million in revenues, with a profit margin of 5
percent. Consider two financing alternatives:
1) You can use all-equity financing by requiring each person to contribute his/her pro rata share.
2) Or, you can finance up to 50 percent of its assets with a bank loan.
Assuming that the debt alternative has no impact on the expected profit margin, what is the difference between the expected ROE if the group finances with 50 percent debt versus the expected ROE if it finances entirely with equity capital?

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Solution Summary

This solution provides a detailed explanation of the given financial accounting questions regarding return on equity (ROE).

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ROE or return on equity will answer the question of whether the owners or stockholders are getting adequate return from their investment. ROE is computed as follows;

Return on Equity = Net Income /Common Equity (Keown et al., 2005)

1. Financing entirely with equity capital would increase the value of the denominator. With the ...

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  • Bachelor of Science in Business Administration, University of the Philippines
  • Master in Business Administration, Saint Mary's University
  • Doctor of Philosophy in Education, University of the Philippines
  • Doctor in Business Adminstration (IP), Polytechnic University of the Philippines
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