Applying the Accounting Equation and Computing Financing Proportions
Use the accounting equation to compute the missing financial amounts (a), (b), (c). Which of these companies is more owner financed? Which of these companies is more non-owner financed? Discuss why the proportion of the owner financing might differ across these three businesses. ($ millions)
Assets = Liabilities + Equity Hewlett Packard…. $74,708 = $36,962 + (a) General Mills ……$18,227 = $ (b) + $4,175 General Motors….. (c) = $365,057 + $6,814 M1-21 Team Answer: 1A) Hewlett Packard the Equity is $37,746 (37,746 + 36,962 = 74,708) 1B) General Mills the Liabilities are $14,052 (14,502 + 4,175 = 18,227) 1C) General Motors the Assets are $371,871(365,057 + 6,814 = 371,871) 1D) While looking over the three businesses it appears that Hewlett Packard is the most owner financed. Th
...e owner financed portion is 50. 5247095%. 1E) While looking over the three businesses it appears that General Motors is the most non-owner financed. The owner financed portion is 1. 8323558%.
The reason the owner financed is different between these companies is because the business and market verticals they are in can affect financing rates, assets needed, liabilities, and much more. For example, Hewlett Packard is in the technology industry where the risks are higher and change is constant. To keep up with the market demand, financing is needed to stay consistent with current technology and create new technology as well.
So, owners would need more equity since the risks are higher and when risks are higher the costs to borrow money is higher. General Mills and General Motors are in more of a constant market where change happens, but at a much slowe
rate. Also, they are in a market where a portion of there portfolio fall more in the line of needs more than wants. People need food and transportation.
They do not need a computer from Hewlett Packard and because of this, the risks are lower because the market is more predictable and stable. So, in turn financing is easier to acquire if needed. E1-34 Computing Return on Equity Starbucks reports a net income for 2006 of $564 million.Its stockholders’ equity is $2,229 million and $2090 million for 2006 and 2005 respectively.
- Compute ROE for 2006
- Starbucks purchased over $850 million of its common stock in 2006. how much did this repurchase affect Starbucks ROE?
- Why do you think a company like Starbucks repurchased its own stock.
E1-34 Team Answer:
- The ROE for 2006 is 26. 11%. (564/2160) A)ROE 2006 = 564/2160 = 26. 11% ROE B)Repurchase of $850 Million of common stock:
- 564/((2,229-850)+2090)/2 = 32. 53% ROE C)Why Would they Repurchase stock:
- Distribute excess capital.
- Fend off a take over.
- Inflate EPS (Earnings Per Share)
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