Question

Starbucks reports net income for 2015 of $2,757.4 million. Its stockholders' equity is $5,272 million and $5,818 million for 2014 and 2015, respectivelya. Compute its return on equity for 2015

b. Starbucks, repurchased over $1.4 billion of its common stock in 2015. How did this repurchase affect Starbucks' ROE?

Answer 1

Step-by-step explanation:

a.)

ROE in full is return on equity. It is used to determine return that investors receive from providing capital in form of shares to a company. In this case, it is calculated by dividing Starbucks' 2015 net income by the total shareholders equity.

ROE = Net income / total equity

ROE = $2,757.4 million / $5,818 million

ROE = 0.4739 or 47.39% as a percentage

Return on equity is therefore 47.4%

b.)

When a company repurchases shares, it means that it is buying back the shares from the shareholders. This can happen when the financial managers think that the company shares are undervalued. The net effect of a buy-back is a reduction in the number of shares outstanding hence in the above formula for ROE, when the denominator (total equity) value is small, the ROE will increase.