1. CP11-5 Computing and Interpreting Return on Equity (ROE) and Price/Earnings (

Question

1. CP11-5 Computing and Interpreting Return on Equity (ROE) and Price/Earnings (P/E) Ratios [LO5]

Aaron%u2019s, Inc., and Rent-A-Center, Inc., are two publicly traded rental companies. They reported the following in their 2008 financial statements (in millions of dollars, except per share amounts and stock prices):

ROE

Aaron%u2019s, Inc., and Rent-A-Center, Inc., are two publicly traded rental companies. They reported the following in their 2008 financial statements (in millions of dollars, except per share amounts and stock prices):

Explanation / Answer

Hi,

Please find the answers as follows:

Requirement 1

Part A:

ROE = Net Income/Average Shareholder's Equity

Aaron's ROE = 90.2/(761.5 + 673.4)/2 = 12.6%

Rent A Car's ROE = 139.6/(1079.2 + 947.1)/2 = 13.8%

Part B:

Rent A Car's generates more Return on Stockholder's Equity.

Requirement 2

Part A:

P/E Ratio = Stock Price/EPS

Aaron's P/E Ratio = 26.67/1.69 = 15.8

Rent a Car's P/E Ratio = 19.37/2.10 = 9.2

Part B:

Yes, investors do appear to value one company more than the other.

Thanks/

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