108 31 Return on Equity in Presence of Large Treasury Stock Balance NJ Simpson Inc. reported the following equity accounts in its 2019 balance sheet. Stock prices for the past three year-ends of 2019, 2018, and 2017 are: $244.80, $196.96, and $136.34, respectively. Shareholders' Equity (5 millions, expect par and shares) 2019 2018 2017 Common stock - par value 51 per share (authorized 70,000,000 shares issued 40,000,000 shares) $40 $40 $40 Additional paid.in capital 1.240 1,240 1,240 Accumulated other comprehensive income (96) (220) Retained earnings 1,419 1.340 1.209 Stockholders' equity before treasury stock 2.807 2.524 2.269 Less: common stock held in treasury, at cost (15.360,000. 10.336,000, and 980,000 shares, respectively) (2.776) (1.844) (114) Total shareholders' equity 680 2.155 Equity attributable to noncontrolling interest (6) (6) (6) Equity attributable to company shareholders 525 $674 $2,149 The income statement for NJ Simpson Inc. reports the following. $ millions 2019 2018 2017 Earnings attributable to company shareholders $405 5301 $217 Consolidated net income 303 218 a. Compute return on equity for 2019 and 2018, under the following assumptions. Traditional definition of equity. With adding back treasury stock to equity. Using market value of equity instead of book value. Round answers to one decimal place (ex: 0.2345 = 23.596) ROE computation 2019 Traditional 1155 21.4% No treasury stock 15.3% 12.6 % Market value of equity 6.89% 5.43% X 409 2018 b. Which of these metrics do we believe best measures the company's return for the past two years? Select which statement is correct. Traditional ROE is inflated by the small equity balance in the denominator. This version does not truly measure the company's performance. ROE with no treasury stock is inflated by the small equity balance in the demoniator as it assumes the company could sell the treasury stock and add the cash to assets. ROE using market value potentially overstates current period performance because the ratio includes the company's high stock price, which by definition impounds future earnings. All of these statements are correct.X