ROE best, difficulty, getting, referring

andytrader

In calculating the ROE, I am having difficulty going getting the A/E when they give you D/E.

In one problem, they said D/E =2 and so they use (D+E)/E= 3 in calculating ROE. I am confused....

When I calculate it, I come up with A/E = 1.5. If D/E = 2, then D=1.5E and assuming D+E=A, A=1.5E. Can someone please explain to me where I am going wrong here or how best to think about it? Thanks.

I am referring to Schweser Self Test Equity Investments Problem #11 on page 255 if anyone is wondering. Thanks.

JoeyDVivre

so if D/E = 2 that means that it must be 2/1 right?


there fore total capital is 2 + 1.


if debt =2 and equity = 1 then assets equal 3

and A/E is 3/1

JGovender

edited



Edited 1 time(s). Last edit at Thursday, November 18, 2010 at 01:18AM by oz001.

pogo

A/E = (D+E)/E = D/E +1

CP

ramzes

It's important to realize that the financial leverage ratio is NOT the same as the debt/equity ratio, even if it addresses the same concept (how much debt is in the capital structure). (I messed this up a few times when I was studying for L1 as well).

Financial Leverage Ratio is what goes into the Dupont Model. A/E = (D/E+1)



Edited 1 time(s). Last edit at Friday, November 19, 2010 at 05:11PM by bchadwick.

studyn

Oh yes! I remember getting confused between these two as well back in the day.

bchadwick Wrote:
-------------------------------------------------------
> It's important to realize that the financial
> leverage ratio is NOT the same as the debt/equity
> ratio, even if it addresses the same concept (how
> much debt is in the capital structure). (I messed
> this up a few times when I was studying for L1 as
> well).
>
> Financial Leverage Ratio is what goes into the
> Dupont Model. A/E = (D/E+1)

Maddin

wow i totally took the long way haha