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Return on Equity (ROE)

WACC and expected return on equity

A firm has a WACC of 12%, $500,000 in 9% debt, $800,000 in equity. Both debt and equity are shown at market values, and the firm pays no taxes. Recall with no taxes that the expected return on assets equals the WACC. Determine the expected return on equity.

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

Calculating average annual return

If a private equity investment loses an average of 15% for each of its first 3 years, what average annual return must it achieve over the next 10 years in order to provide its owners a 20% annual return over the 13 year period?

ROE change with asset reduction

Last year: Sales = $200,000 Assets = $125,000 Profit Margin = 5.15% Equity Multiplier = 1.85 Assets will be reduced by $25,000 without affecting sales or costs. How much would the ROE change with this asset reduction?

ROA Versus ROE

Effect of adding debt to balance sheet on ROA versus ROE. Why does ROE vary more widely when company acquires debt. Total assets $100,000, net income $10,000 compared to 50% equity financed firm with same income and 5% cost of debt.

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?

ROE

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

Return on equity

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-assets ratio was 37.5%. Based on the DuPont equation, what was the ROE?

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

ROE

Last year Kruse Corp had $275,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the

ROE

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $320,000 and its net income was $10,600. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital struc

Question about Change in ROE

Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, 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 under a contract with existing

ROE

Last year Kruse Corp had $355,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the

Calculating the Return of Equity (ROE)

Company has the following characteristics: Sales $1,000 Total Assets $1,000 Total Debt/Total Assets 35% EBIT $200 Tax Rate 40% Interest Rate on Total Debt 4.57% What is their ROE?

Return of Common Equity: Example Problem

I have a problem finding out about the ROE in this problem. The following characteristics: Sales $1,000 Total Assets $1,000 Total Debt/Total Assets 35% EBIT $200 Tax Rate 40% Interest Rate on Total Debt 4.57%

Business Finance

1.The ________ measures the return on owners' (both preferred and common stockholders) investment in the firm. 1. 1. return on total assets 2. 2. price/earnings ratio 3. 3. return on equity 4. 4. net profit margin 2.If Nico Corporation has annual purchases of $300,000 and accounts payable of $30,000, then av

Calculating Financial Leverage of a Firm

A firm has a return on common equity of 13.4 percent, a net after-tax borrowing cost of 4.5 percent, and a return of 11.2 percent on net operating assets of $405 million. What is the firm's financial leverage?

Calculate return on common equity

From the following information, calculate the return on common equity for the year 2009 (amounts in millions of dollars). There were no share repurchases. Common shareholders' equity December 31, 2008 174.8 Dividend paid to common shareholders 8.3 Share issue on December 31, 2009 34.4 Common shareholders' equity

ROE on Starbucks

Please give a detail report for the ROE on Starbucks for 2007-2008. Need Excel spread sheet. Please discuss the trend for the ratio and what it tells a person about the organization's financial health.

ROE, Opportunity Costing, BE point, Variable Cost

The Bowley Company manufactures several different products. Unit costs associated with product ICT101 are as follows: Direct materials $60; Direct labor $10; Variable support costs $18; Fixed manufacturing support costs $32; Sales commissions (2% of sales) $4; Administrative salaries $16; Total Costs $140.Total variable costs as

Internal equity vs external compensation equity

What is the importance of internal equity vs external compensation equity to an employer and an employee? What are the advantages and disadvantages of both to a company? As a manager, how can you ensure internal and external equity in the workplace?