In analyzing two firms in the same industry, we gather the following information: Firm A Net income for the year Common equity, Jan 1 Common equity, Dec 31 Cost of equity capital $120 $950 $1,050 10% Firm B $130 $2,000 $2,000 10%
In analyzing two firms in the same industry, we gather the following information: Firm A Net income for the year Common equity, Jan 1 Common equity, Dec 31 Cost of equity capital $120 $950 $1,050 10% Firm B $130 $2,000 $2,000 10%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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Transcribed Image Text:In analyzing two firms in the same industry, we gather the following information:
Firm A
Net income for the year
Common equity, Jan 1
Common equity, Dec 31
$120
$950
$1,050
10%
Firm B
(A) Firm A's return on equity (ROE) for the year is 11.4%.
(B) Firm A's return on equity (ROE) for the year is 12.6%.
$130
$2,000
Cost of equity capital
Assuming there are no accounting distortions, which of the following statements is correct?
$2,000
10%
Firm A is a less attractive investment opportunity than Firm B because Firm A has a lower net income.
D
Firm A is a more attractive investment opportunity than Firm B because Firm A's return is greater than its cost of equity
capital.
E There is more than one correct statement.
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