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 44.8 % b. Starbucks repurchased over $1.4 billion of its common stock in 2015. Did this repurchase increase or decrease 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. If Starbucks had not repurchased common stock in 2015, what would ROE have been? Note: Round answer to one decimal place (example: 20.6%). Answer %

Answer 1

Answer:

A. 44.82%

B.

Option b. Return On Equity usually increases since the repurchase of shares reduces the denominator (avg. stockholders' equity)

C.

Option b. The Companies would tend to repurchase their own stock if they feel the stock is been undervalued by the market

Step-by-step explanation:

a. Computation for return on equity for 2015

Using this formula

Return on equity = The Net income amount /The Average stockholders' equity amount

Let plug in the formula

Return on equity=2,634.4/[(5,605+6,151)/2]

Return on equity=2,634.4/(11,756/2)

Return on equity=2,634.4/5,878

Return on equity=0.4482×100

Return on equity= 44.82%

b. In a situation where they repurchased over $1.4 billion of its common stock in the year 2015 this means that the RETURN ON EQUITY will usually tend to increases reason been that the repurchase of shares will often reduces the denominator (average stockholders' equity)

Therefore the repurchase increase Starbucks’ Return On Equity.

c. In a situation where Starbucks had not repurchased common stock in the year 2015, what their Return On Equity would have been is that they will repurchase their own stock if they feel the stock is been undervalued by the market