What happens to ROA / ROE / ROIC if the company needs additional funding, which it...

What happens to ROA / ROE / ROIC if the company needs additional funding, which it raises through additional equity ?

Expert Solution

When additional capital is raised through additional equity, the main parameter that is being impacted at the time the equity is raised is the Equity component (where we still do not know for what the additional equity is used yet (if for purchase of additional assets or for some other cash flow needs)). As we still do not know if the additional funding has any impact on the return, we can only assume that the return has not yet changed yet.

Thus among the parameters mentioned above,

ROA: return on asset is not impacted as the return and assets as assumed above has not changed.

ROE: return on equity has decreased as the return has not changed but equity has increased ( higher denominator than earlier)

ROIC: return on invested capital has decreased as the the return has not changed and the jnveste capital has increased ( due to increased invested equity which is additional invested capital). Thus increased denominator has decreased the ratio amount.

Thus ROA is unchanged and ROA & ROIC decreases.

jeff jeffy answered 2 months ago

Q1: ROE, ROA, ROIC are given for Company A and Company B (unrelated to Flash Memory)....

Q1: ROE, ROA, ROIC are given for Company A and Company B (unrelated to Flash Memory). Company A Company B Interest rate 6.0% 8.0% Income tax rate 17.0% 17.0% Debt 585 100 Equity 348 833 TOTAL LIAB+EQUITY 933 933 EBIT 86 86 - Interest expense 35.1 8 Earnings before tax 50.9 78 - Income tax 8.7 13.3 Earnings after tax 42.2 64.7 Ratio Fraction Ratio Fraction Numerator Denominator RETURN ON EQUITY (ROE) 12.1% 42.2/348 7.8% 64.7/833 Earnings after tax Equity...

BEP, ROE, AND ROIC Broward Manufacturing recently reported the following information: Net income $285,000 ROA 10%...

BEP, ROE, AND ROIC Broward Manufacturing recently reported the following information: Net income $285,000 ROA 10% Interest expense $91,200 Accounts payable and accruals $950,000 Broward's tax rate is 35%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, while 60% of its total invested capital is common equity. Calculate its basic earning power (BEP), its return on equity (ROE), and its return on invested capital (ROIC). Round...

Marcus Company, is a successful start up business, but needs additional funding of $500,000 to fund...

Marcus Company, is a successful start up business, but needs additional funding of $500,000 to fund continued growth. Currently the company is worth $1,500,000. An angel investor is willing to invest the full $1,500,000. The owner of the company currently owns all 100,000 shares in her business a. Calculate the fair price per share b. How many additional shares must be sold to the angel investor? c. What proportion of the company will the angel investor own? d. What are...

what is ROA, what is ROE and what each of these ratios signify?

Which of the following transactions would have an immediate positive impact on ROE and ROIC (make...

Which of the following transactions would have an immediate positive impact on ROE and ROIC (make them go up), ignoring depreciation, interest expense, and taxes? a. The company purchases machinery using trade credit for $20,000. b. The company collects $30,000 from customers on accounts receivable c. The company pays off bank-notes payable for $10,000 by rolling short-term debt into long-term debt of 5-year bonds at the same interest rate. d. The company sells common stock for $30,000. e. None of...

This particular company has an ROE of 13.25%, but an ROA of 1.47%. It has 75.5%...

This particular company has an ROE of 13.25%, but an ROA of 1.47%. It has 75.5% of its assets in Long-term Investments, and most of the rest is in Cash and Cash Equivalents. On the Liabilities side, Current Liabilities almost match Long-term Investments. It has an Equity Multiplier of 9.15. This company is a/an: Commercial Bank Savings & Loan Investment Bank Insurance Company Investment Company

Company has an ROA of 8.4 percent, a profit margin of 9.50 percent, and an ROE...

Company has an ROA of 8.4 percent, a profit margin of 9.50 percent, and an ROE of 15.50 percent. Requirement 1: What is the company’s total asset turnover? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Total asset turnover times Requirement 2: What is the equity multiplier? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Equity multiplier times

Horus has developed successfully and needs additional funding. An IPO seems to be a natural step...

Horus has developed successfully and needs additional funding. An IPO seems to be a natural step forward. After the bookbuilding phase, it is decided that 1,000,000 stocks would be sold in the IPO at a per-unit price of $10. You think that there is a 0.55 probability that the price will go up to $13 (underpricing) and 0.45 probability it will go down to 8 (overpricing) . You also know that there are two types of investor in the market...

A firm has an ROA of 15%, profit margin of 3% and ROE of 30%. What...

A firm has an ROA of 15%, profit margin of 3% and ROE of 30%. What is its liability to total asset ratio? 50% 60% 70% 20% A firm has an ROA of 15%, profit margin of 3% and ROE of 25%. What is its liability to total asset ratio? 59.88% 60.05% 40.00% 20.16% A firm has an ROA of 15%, profit margin of 3% and ROE of 25%. What is its liability to total asset ratio? 59.88% 60.05% 40.00%...

1) Based on the calculation , discuss relationship between ROA anfd ROE A company Z company...

1) Based on the calculation , discuss relationship between ROA anfd ROE A company Z company Average of ROA 12% 10% Standard deviation of ROA 5.89% 5.57% Standard deviation of ROE 8.45% 7.13% 2) which company has higher ROE and what is the reason of it? 3) which company has more volatility of roe and what is the reason of it ?

Question