Starbucks reports net income for 2015 of $2,558.4 million. Its stockholders' equity is $5,716 million and $6,262 million for 2014 and 2015, respectively. a. Compute its return on equity for 2015. Round answer to one decimal place
b. Starbucks repurchased over $1.4 billion of its common stock in 2015.

a.

42.7%

b.

48.4%

Explanation:

a.

Return on equity is the ratio of net income to its total equity.

Use following formula to calculate the Return on equity

Return on equity = Net Income / Average equity

Return on equity = $2,558.4 million / ( ( $5,716 million + $6,262 million ) / 2 )

Return on equity = 0.427

Return on equity = 42.7%

b.

Repurchase of common stock will reduce the equity value and as a result it reduces the average equity value used in the denominator of Return n equity formula. Ultimately the ROE will be improved.

Return on equity = $2,558.4 million / ( ( $5,716 million + ($6,262 million - $1,400 million ) / 2 )

Return on equity = 0.484

Return on equity = 48.4%

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