C2 Nov 2001 #50

[sunshine]

This is a question with lots of extraneous info, so I'm only going to include the relevant parts.

Earnings available for common stockholders: $600 in 2001
Balance sheet: common shareholders equity $6,000 in 2001, $7,000 in 2000
Market value of equity $7,000 in 2001, $7,500 in 2000

What is the return on equity for 2001?

Answer: 600/[(6000+7000)/2]

My questions: Which 7000 are they using? And why are they averaging 6000 and 7000?

Thanks!

[Dr T Non-Fan]

Should always be the balance sheet items, but then I also think it should be only 6000 in the denominator, and not the average.


Must be something in the text about "return on equity." Look in the index for it.

[shluffer]

One of the many formulas the text has for ROE is:
ROE = earnings available to shareholder/average equity

[mchung]

I agree with shluffer

Michael

[Avi]

Me 2 8)

[retaker]

must be the market value and ballance sheet equity in 2001?

[Avi]

No, the avg book equity available in 2000.
On 1/1 it was 7000, on 12/31 it was 6000, so the avg available that year was 6500.

I don't think we use the mkt values at all, then again I could be wrong :duh:

--Avi

[retaker]

Thanks.

[shluffer]

If i remember correctly, we use market values for financing decisions and book values for ratios. So ROE uses book values not market values.