Question

Which of the following is not an action that a company's management team can take to help meet or beat the investor-expected targets for ROE in upcoming years? Copyright © by Glo-Bus Software, Inc. Copying, distributing, or 3rd party website posting isexpressly prohibited and constitutes copyright violation. -- Always issuing new shares of common stock to raise capital (and cover negative projected year-end cash balances) for use in the company's camera/drone business Pursuing efforts to boost total operating profits in all four geographic regions the resulting growth in operating profits companywide will increase total net profits (a company's net profits are the numerator in calculating the company's ROE) o Increasing annual dividend payments to shareholders (because all net profits not paid out as dividends are treated as retained earnings and because bigger retained earnings have the effect of increasing shareholders equity) Borrowing money from the Global Community Bank (preferably in the form of a 1-year loan that can be fully or mostly repaid the following year) and using the proceeds to repurchase outstanding shares of common stock; such action makes considerable financial sense when the company's stock price is expected to rise substantially in future years and/or when unexpectedly weak company performance in the prior year causes a drop in its stock price o Using a portion of the company's internal cash flows from operations for the next several years to repurchase shares of common stock

Answer 1

Issuing new shares of common stock to raise capital is the action that does not help improve a company's Return on Equity (ROE), as it could dilute shareholders' equity without proportionally increasing net profits.

Step-by-step explanation:

When a company's management team seeks to meet or beat investor-expected targets for Return on Equity (ROE), they have several actions to consider. However, not all actions are conducive to improving ROE. The action that does not help in this aspect is always issuing new shares of common stock to raise capital. Issuing new shares can dilute the current shareholders' equity and, unless the capital raised is used very effectively, may not improve ROE. Instead, it could lead to more shares outstanding without a proportional increase in net profits, thereby potentially reducing the ROE.

Other actions, such as boosting operating profits, borrowing money to repurchase shares, and using internal cash flows to repurchase shares can positively impact the ROE. These measures are designed to either increase net profits, the numerator in the ROE calculation, or reduce shareholders' equity, the denominator, thus improving the ROE ratio.