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Guidance Co also raised loan capital for the first time during the year ended 31 December 20X6 of $20 million in order to help with the buy-back of the company’s shares.
Answer:
The raising of the loan capital was also legitimate but was not adjusted for because ROE is based on assets, not net assets.In other way, it means raising of loan capital relevant to net asset.
Why raising of loan capital relevant to net asset?
Dr Asset – Bank $20m
Cr Liability – Loan $20m
Net asset will be zero.
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