Question

Starbucks reports net income for 2015 of $2,634.4 million. Its stockholders' equity is $5,605 million and $6,151 million for 2014 and 2015, respectively. a. Compute its return on equity for 2015. Round answer to one decimal place (ex: 0.2345 = 23.5%) Answer% b. Starbucks repurchased over $1.4 billion of its common stock in 2015. How did this repurchase affect Starbucks' ROE? ROE usually decreases since the repurchase of shares reduces the denominator (avg. stockholders' equity). ROE usually increases since the repurchase of shares reduces the denominator (avg. stockholders' equity). ROE usually increases since the repurchase of shares increases the denominator (avg. stockholders' equity). ROE usually decreases since the repurchase of shares increases the denominator (avg. stockholders' equity). c. Why do you think a company like Starbucks repurchases its own stock? Companies repurchase their own stock if they feel it overvalued by the market. Companies repurchase their own stock if they feel it undervalued by the market

Answer 1

Solution and Explanation:

Answer a The following formula will be used to calculate the return on the equity.

Return on equity = Net income divide by Average equity The return on equity is equal to
`2,634.4 /((5,605+6,151) / 2)` Thus, return on equity is equal to 44.82% Answer b Correct answer is the option: ROE usually increases since the repurchase of shares reduces the denominator (avg. stockholders' equity)

Answer c Correct answer is the option: Companies repurchase their own stock if they feel it undervalued by the market.