Don't be trapped by this~~~

CFA Level II
#1

Hi, given EPS, BV, and ROE from 2003 to 2007. In calculating 2007 normalized EPS, and normalized ROE, do we include 2007 data? A. No, we average (2003~2006) to get normalized EPS, or ROE B, Yes, we average (2003~2007) to get normalized EPS, or ROE C. We average EPS from (2003~2006) to get normalized EPS, but average ROE(2003~2007) to get normalized ROE. D. We average ROE from (2003~2006) to get normalized ROE, but average EPS(2003~2007) to get normalized EPS. which one is correct? and why!!!

#2

B don’t think you should leave 2007 info out

#3

You will use a normalized EPS to correct for events that are not operational but do have a big effect on earnings. Your question is therefore too minimal to answer, we’d need information about the reliability of past EPS figures. If this one comes from a question, the question will have mentioned if the 2007 data was affected by strikes, floods or whatever.

#4

I like A

#5

I would go with A because we want to avoid having 2007 in our calculations since that is not a representative year and thats the reason we are trying to calc normalized EPS. Does that sound right?

#6

I like A

#7

On study notes book 4, page 249, EPS & ROE in 2007 are included in calculation. However, according to 2006 CFA exam, which you can find on curriculum vol.4, 2007’s data are NOT included. Which one to believe?

#8

I go with mcpass I have done questions where I either excluded the first year or last year depending on which is kind of outlier (example, year don’t belong to a particular business cycle)

#9

it depends if 2007 is estimated or in the books. If in the books, you would use, at least for EPS…with ROE, not as sure, but I believe the same

#10

There is a note in the vignette of the 2006 exam that says 2007 should not be included

#11

you use the years that reflect the business cycle. I think I remember a vignette like this- but it specified that 2003~2006 was the business cycle… so that what you’d use. What you posted doesn’t include that note…

#12

I would think A too… but in the absence of any reliability problem with 2007 data it also may make sense to make that also part of the ROE calculation. EPS can come out of ROE*prior BV, so I wouldn’t be surprised by C

#13

Did a Q last night where all ROE data was used…

#14

Yeah, I was totally f*cking confused on the 2006 CFAI exam of why it WASN’T included, yet all the stuff I ever did in Schweser had included that in arriving at the average. This is a GREAT question. Any definitive answer on this shite?

#15

rekooh Wrote: ------------------------------------------------------- > it depends if 2007 is estimated or in the books. > If in the books, you would use, at least for > EPS…with ROE, not as sure, but I believe the > same This sounds right to me.