8 UsingthisexpandedversionofROE,thegrowthratecanbe
written as:
Theadvantageofthisformulationisthatitallowsexplicitly
for changes in leverage and the consequent effects on growth.
ILLUSTRATION 4.5: Breaking Down Return on Equity:
ExxonMobil and Toyota
Toconsiderthecomponentsofreturnonequity,welook,in
thefollowing table,at ExxonMobiland Toyota, twofirms
whose returns on equity we looked at in Illustration 4.4.
ComparingthesenumberstothosereportedinIllustration4.4,
notethatthereturnonequityislowerforbothfirmsusingthis
extendedcalculation.Onereasonforthedifferenceistheuse
ofmarginaltaxratestocomputereturnsoncapitalandequity
inthisillustration,whereasweusedthereportednetincome
in Illustration 4.4. Note also that a significant portion of
Toyota’shigh returnonequitycomesfrom itsuse ofdebt
(and the resulting high debt-to-equity ratio).
Average and Marginal Returns
Thereturnonequityisconventionallymeasuredbydividing
thenetincomeinthemostrecentyearbythebookvalue(BV)
ofequityattheendofthepreviousyear.Consequently,the