Question

Return on equity (ROE) indicates a return to the owners of the firm and is closely...

Return on equity (ROE) indicates a return to the owners of the firm and is closely followed by investment analysts. What 4 deficiencies does this ratio have?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Four deficiencies of return on equity

1. Ignores cash flow

ROE uses only net income and ignores cash flow which is an important factor to assess company's performance.

2. Depreciation

If the depreciation is high ,it shows lower net income and leads to lower ROE.

3.Project life span

Projects with longer lifespan are more likely to show overstated return on investment.

4. Investment growth rate

Most fast growing companies requires substantial equity and thus lowers ROE.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Firm A has a return on Equity (ROE) equal to 24%, while firm B has an...
Firm A has a return on Equity (ROE) equal to 24%, while firm B has an ROE of 15% during the same year. Both firms have a total liabilities ratio (Total liabilities/Assets) equal to 0.8. Firm A has an asset turnover ration of 0.8, while firm B has an asset turnover ratio equal to 0.4. From this information, which of the two firms has a higher profit margin? Show calculations and profit margins for both firms. (Hint: Use Dupont equation)
Company Q’s current return on equity (ROE) is 13%. The firm pays out 45 percent of...
Company Q’s current return on equity (ROE) is 13%. The firm pays out 45 percent of its earnings as cash dividends. (payout ratio = .45). Current book value per share is $53. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11.0% and the payout ratio increases to .70. The cost of capital is 11.0%. a. What are...
• If a firm has an ROE of 12 percent, a financial cost effect of 9.5...
• If a firm has an ROE of 12 percent, a financial cost effect of 9.5 percent, and an pre-tax ROIC of 10 percent, what is its debt-to-equity ratio (total debt divided by owners’ equity)? Assume that the firm does not pay any tax.
Company Q’s current return on equity (ROE) is 16%. The firm pays out 60 percent of...
Company Q’s current return on equity (ROE) is 16%. The firm pays out 60 percent of its earnings as cash dividends. (payout ratio = .60). Current book value per share is $62. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 12.5% and the payout ratio increases to .80. The cost of capital is 12.5%. a. What are...
As the CEO of a company, you are interested in raising the ROE (return on equity)...
As the CEO of a company, you are interested in raising the ROE (return on equity) of your firm. Explain what you would do considering the components of the ROE as covered in this course
A firm has an ROE of 4%, a debt/equity ratio of 1.0, a tax rate of...
A firm has an ROE of 4%, a debt/equity ratio of 1.0, a tax rate of 20%, and an interest rate on debt of 5%. What is its operating ROA?
The return on equity (ROE) is an important ratio to investors. Discuss each part of the...
The return on equity (ROE) is an important ratio to investors. Discuss each part of the DuPont Identity as it relates to the ROE. Discuss the type of information that the DuPont Identity reveals compared to the ROE considered alone. What can increase or decrease the ROE?
Company Q’s current return on equity (ROE) is 14%. It pays out 50 percent of earnings...
Company Q’s current return on equity (ROE) is 14%. It pays out 50 percent of earnings as cash dividends (payout ratio = 0.50). Current book value per share is $65. Book value per share will grow as Q reinvests earnings. Assume that the ROE and payout ratio stay constant for the next four years. After that, competition forces ROE down to 11.5% and the payout ratio increases to 0.70. The cost of capital is 11.5%. a. What are Q’s EPS...
A firm wishes to maintain a growth rate of 8 percent a year, a debt-equity ratio...
A firm wishes to maintain a growth rate of 8 percent a year, a debt-equity ratio of 0.34, and a dividend payout ratio of 52 percent. The ratio of total assets to sales is constant at 1.3. What profit margin must the firm achieve? Rentention ratio = 1-0.52 = 0.48 Sustainable growth rate = 0.08 = (ROE) x 0.48) / (1- (ROE x 0.48) ROE = 0.1543 Return on equity = 0.1543 = PM x (1/1.3) x (1+0.34) profit margin...
A firm has an ROE of 9%, a debt/equity ratio of 0.3, a tax rate of...
A firm has an ROE of 9%, a debt/equity ratio of 0.3, a tax rate of 30%, and pays an interest rate of 6% on its debt. Firm’s asset turnover is 0.3 -What is firm’s operating ROA? -What is the firm’ Margin - What is the firms Tax burden? - What is the firm’s Leverage factor? - Given ROA that you found, what percentage of its total ROA firm has to pay as interest? - What is the firm’s interest...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT