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. Required:a. Compute its return on equity for 2015. b. Starbucks repurchased over $1.4 billion of its common stock in 2015. Did this repurchase increase or decrease Starbucks’ ROE? 1. ROE usually decreases since the repurchase of shares reduces the denominator (avg. stockholders' equity). 2. ROE usually increases since the repurchase of shares reduces the denominator (avg. stockholders' equity). 3. ROE usually increases since the repurchase of shares increases the denominator (avg. stockholders' equity). 4. 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?

Answer 1

Answer:

a) return on equity (ROE) = net income / average shareholders' equity

average shareholders' equity = ($5,605 + $6,151) / 2 = $5,878

ROE for 2015 = $2,634.4 / $5,878 = 44.82%

b) 2. ROE usually increases since the repurchase of shares reduces the denominator (avg. stockholders' equity).

This is simple math, e.g. 1/2 > 1/3, if stockholders' equity decreases, while net income remains the same, ROE will increase.