FSA: ROE question, really, equity, should

hoangvu90

Is it NI(t)/Equity(t-1)?

I remeber I saw some question which use Equity(t), but I think it really should be last year end equity, is it? Thanks

smuggycfa

ROE = ni/avg equity

ive never seen it as ni/last years equity

Sometimes they use ni/ending equity

Use last years equity for RI models. cost of equity * last years book value = equity charge.

economicz

In equity, when calculate RI, it actually use previous year ending to get this year's earning (NI), it implys to use Equity(t-1).

in FSA, the answer of some question Equity(t) and NI (t) to get ROE.....


revisor Wrote:
-------------------------------------------------------
> When in doubt, refer to CFA text Volume 2 (ratios
> are presented justbefore the readings begin). I
> think ROE was defined as NI(t) divided by AVERAGE
> ROE in t (end and beginning values in t)

giorgio10

When in doubt, refer to CFA text Volume 2 (ratios are presented justbefore the readings begin). I think ROE was defined as NI(t) divided by AVERAGE ROE in t (end and beginning values in t)

Analyze_This

Well, residual income is defined as NI(t) - r*BV(t-1) = (ROE - r)*BV(t-1)

So for residual income, it has to be Equity(t-1).

For the DuPont model Financial Leverage is defined as (Average Assets)/(Average Equity).

That means the ROE suggested by the DuPont model uses average equity to determine ROE.


It probably just depends on what they ask, and what they give you. I suspect the question will make it obvious which one to use. Obviously if it doesn't give you enough info to calc average equity, just use (t-1).