effect of SL and DDB

CFA Level I
#1

Explain the effect of those two dep methods, on ROE and ROA of a company. Assume that company’s is growth company (capex is rising)

#2

SL= higher NI, higher ROE higher ROA ddb= lower NI, Low ROE, lower ROA

#3

wait, might be lower ROA under SL and higher ROA under DDB confused now

#4

One to the other? SL: lower depreciation expense=> higher NI=>higher RE=>higher E=> higher ROE (Ni dominant effect); higher assets => lower ROA DDB: higher depreciation expese=>lower NI=>lower RE=>lower E=> lower ROE; lower assets => higher ROA

#5

nice map, got mixed up on that ROA @ first,

#6

getterdone Wrote: ------------------------------------------------------- > nice map, got mixed up on that ROA @ first, not even 2 wks to go… seems like th eonly person who is gonna pass is map. THIS IS NOT THE TIME TO GET MIXED UP. its time to be crystal clear. I AM SO F!@#@!#

#7

ROA is higher with SL because the % change in net income is greater than the % change in assets

#8

This is what I get: SL: ROA lower, ROE higher DDB: ROA higher, ROE lower

#9

your right pepp the decrease in assets in a more dominant effect, espcially with capital expenditures increasing. if cap expeditures weren’t increasing, then ROA would be higher for DDB in the later years

#10

I was totally wrong, and I have to say it. In SL, as well as in DDB, the return ratios follow the Net Profit Margin. As such, both ROA and ROE follow the direction of the NI/Sales because the NI effect is greater. SL: NI/S goes up, ROA=NI/TA goes up, ROE=NI/E goes up. Asset Turnover=Sales/Asset goes down, and so does D/E DDB (or any other accelerated method): NI/S goes down, and ROA=NI/TA goes down, ROE=NI/E goes down. Asset Turnover=Sales/Asset goes up, and so does D/E.

#11

okay, revised answer SL: ROA higher, ROE higher DDB: ROA lower, ROE lower