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%)

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

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? select

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

given

Net income of StarBucks for the year 2015 = $2,634.4 million.

Its stock holders equity = $5,605 million and $6,151 million for 2014 and 2015, respectively.

a) return on equity for 2015 = (Net Income)/(Average stock holders equity) = 2634.4/((5605+6151)/2) = 0.448 = 44.8%

b) ROE usually increases since the repurchase of shares reduces the denominator (avg. stockholders' equity).

c) Companies repurchase their own stock if they feel it undervalued by the market.