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Chapter 2: 30BP_g (page 85)

Omni Technology Holding Company has the following three affiliates:

Software

Personal Computers

Foreign Operations

Sales

\(40,200,000

\)60,080,000

$100,680,000

Net Income (after tax)

2,086,000

2,880,000

8,510,000

Assets

5,820,000

25,790,000

60,630,000

Stockholder’s equity

4,090,000

10,170,000

50,950,000

g. Returning to question d, explain why the personal computer affiliate has a higher return on stockholders’ equity than the foreign operations affiliate even though it has a lower return on total assets.

Short Answer

Expert verified

The personal computer affiliate has higher return on stockholder’s equity than foreign operation because the personal computer affiliate has a higher debt ratio than the foreign operation affiliate.

Step by step solution

01

Return on stockholder’s equity

Return on stockholder equity is computed by an organization by dividing the net income of the company with the stockholder’s equity.

02

Comparison of return on stockholder’s equity and debt ratio between the software, personal computers and the foreign operation

Name of Affiliates

Return on stockholder’s equity

Software

51%

Personal computers

28.32%

Foreign operations

16.70%

Name of Affiliates

Debt ratio

Software

29.73%

Personal computers

60.57%

Foreign operations

15.97%

The personal computers has higher return on stockholder’s equity than the foreign operation because of the high debt ratio of the personal computers.

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Most popular questions from this chapter

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