HI, so regarding the example on p.612 (Equity book, CFA texts). 2b) calculate RI based on NI+OCI? In the answer for year 2 RI is 0.45$. The formula says it’s calculated by RI=NI+OCI- (SE(t-1)*r). If you plug in the numbers RI= 2.48+1-(10.32*0.1)=2.448. What’s going on??? There’s no errata yet…But they have in the table 0.45$ Before looking at the solution I calculated RI as : NI-OCI- (SE(t-1)*r)=0.448 (without realizing you’re supposed to add OCI). So why like this?

I am not sure as to what your exact question is. But I will try any ways. Other Comprehensive Income (OCI) has to be added to the Income statement to ensure that it gets included in the Net Income (NI). OCI is taken directly to equity without passing through Income Statement. So, in order to keep both the numerator and denominator of ROE (NI/Equity Book Value) consistent, we have to include OCI in the Income statement as well so that NI can reflect the OCI. Otherwise only the denominator (Book value) will contain OCI, but not the numerator and hence ROE will be understated. Paddy

Thanks Paddy, I do understand that OCI needs to be added. My question is: why they have said in the example that you ADD OCI to NI (like you are meant to do), when in fact, the actual figure they have calculated hints that they have subtracted OCI from NI. RI=NI + OCI- (SE(t-1)*r) = 2.48+1-(10.32*0.1)=2.448 RI=NI - OCI- (SE(t-1)*r)= 2.48-1-(10.32*0.1)=0.448 /// 0.448 (~0.45) is the figure they give in the book for the residual income in year 2. I.e the 0.45 is the figure they give for the residual income. And it results from subtration from, not addition to NI. I don’t understand why.

I don’t know if they actually hint in the assignment, that OCI is actually negative, which would explain why it is subtracted: NI+ (-OCI)…=NI-OCI