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Question: question one the roe for australias four largest banks for...

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QUESTION ONE

The ROE for Australia’s four largest banks for the year 2019 is respectively 13.80% (CBA), 10.40% (Westpac), 11.70% (NAB) and 11.90% (ANZ)?

 

Required:

 

A.     There is little variation in the magnitude of the ROE’s between the banks. Provide an economic explanation for why (2 Marks)?

A.            The magnitude of the ROE’s for the banks is approximately what should be expected  (the long-run share returns is 10 to 12%). Why may there be less accounting bias in reporting on the ROE of banks than for firms in other industries (3 marks)?

 

QUESTION TWO 

The ROE for FIRM X  for the financial year 2019 was 22.7% and has been consistently greater than 20% for at least the past five years.

FIRM X (ASX:BRG) generates the majority of its income from household appliance wholesaling in Australia. FIRM X is engaged in the innovation, development, marketing, and distribution of small electrical appliances. FIRM X is a market leader and invests heavily in R&D and advertising. Marketing and R&D spend as a percentage of net sales represents 11% in FY19.   

 

Some Ratios for FIRM X 2019

ROE

22.70%

RNOA

20.35%

ATO

2.22

Leverage (NFO/Equity)

15.60%

NBC

5.27%

Spread

15.09%

 

Required:

 

Is the ROE of FIRM X high compared to a typical company? Using both the qualitative and quantitative information (and any further ratios that can be calculated from the provided information) provide an economic explanation as to why FIRM X has been able to achieve ROE consistently greater than 20%.  Accounting biases and measurement error are not part of the answer. (5 Marks)

 

* Q2 requires qualitative and quantitative answers

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