Global Financial Management - Essay Example

Global Financial Management ROE can be defined as the amount of net income that is returned as a percentage of shareholders equity. It measures the rate of return of the common shareholders ownership interest. ROE also calculates or determines the ability of a company to create profit from shareholders equity. It measures how a firm is able to use its investment and funds to foster development and growth. ROE has several advantages including evaluation of managers.ROE can be used to measure the managers’ performance.

If the return on equity is high, that means that the managers are utilizing the investments well and creating profit. ROE has the advantage of flexibility. When selecting projects to invest in overseas, it enables one to either use the simple way of calculating and measuring income or use a more complex way with so much details. Return on Equity can of benefit when used in trend analysis. This means that using ROE can enable a company to calculate its return on equity over a number of years. However, ROE has some disadvantages when selecting projects to invest in overseas.

It only shows the company’s equity investment performance. Therefore, a company might have leveraged its investment in a huge amount of debt, but improving its ROE as long as the debt is creating income. Another disadvantage of ROE is the fact that it only measures the net income. Net income includes revenue without the expenses, which means that ROE is affected and lowered if a company has large amounts of capital assets. Internal Rate on Return can be defined as the return rate used to measure the amount of profit generated by investment in capital budgeting.

It’s used to indicate the efficiency and quality of an investment. IRR is also used to measure whether projects and investments are appealing. Its advantages when selecting projects to invest in overseas include; time value whereby the cash flow is weighed equally using the time value of money. This is because the future cash flow timing is put into consideration. Another advantage is the way IRR makes it simple to measure the value of several projects together that have been put into consideration.

Internal Rate on Return has a number of disadvantages. This method does not consider future costs as it only calculates the cash flow created by a project hence leaving out the capability of the project creating cash flow in future. Another disadvantage is the fact that IRR does not consider the size of the project. It only measures cash flow in comparison to the amount of capital creating that cash flow. IRR has the disadvantage of leaving out the rates of investment. This is because IRR assumes that in future, cash flow will be invested again together with the IRR.

Most of the times, chances of generating a return of that manner are very limited. The Coca Cola Company is under the food and beverage industry. The company’s total shareholder equity for the quarter that ended in March 2014 was $32,654M, so the company’s return on equity for that quarter was 19.84%. In duration of 13 years, Coca Cola co’s highest ROE was 56.76%, and the lowest was 23.37%. The company calculated the annual ROE for the year 2013 which was about 25.88%. For the quarter that ended in March 2014, the Coca Cola co’s ROE was 19.83%. The MacDonald’s company is also under food industry.

It is considered as the forth in return on equity among other related companies. The MacDonald’s company ROE based on the latest financial information given, is 35.69%. This Roe is 562.91% lower than that of the services sector and 357000.0% lower than that of the restaurants industry. The Return on Equity for all the stock available is 560.52% lower than the company. Its annual ROE for the quarter that ended in Dec 2013 was 34.92%.