Question

computing return on equity starbucks reports net income for 2018 of $4,518.3 million. its stockholders’ equity is $5,450.1 million and $1,169.5 million for 2017 and 2018, respectively. a. compute its return on equity for 2018. b. starbucks repurchased over $7,208.7 million of its common stock in 2018. did this repurchase increase or decrease starbucks’ roe? c. if starbucks had not repurchased common stock in 2018, what would roe have been?

Answer 1

The ROE would remain at 136.51% without a share repurchase and would improve further with a share repurchase

What is ROE?

ROE means return on equity, it is determined as the net income as percentage of stockholders’ equity

ROE=net income/average stockholders’ equity

net income= $4,518.3 million

average stockholders’ equity=($5,450.1+$1,169.5)/2

average stockholders’ equity=$3309.8

ROE in 2018= $4,518.3/$3309.8

ROE in 2018=136.51%

However, the repurchase of shares would reduce the  stockholders’ equity, the denominator of the ROE, hence, ROE would increase

Without the common stock repurchase in 2018, the ROE of the company would have remained at 136.51%

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