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
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)
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).
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.
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)
I always thought that if they gave you statements for multiple years, you would use this years IS figures, and average the BS figures unless otherwise stated.