Hi, I failed June, and retake in Dec. I remember that there were several questions on the exam to calculate g, but were ROA was given not ROE. And I could not solve them than. Now I have looked at FSA again, but cannot come up with any explanation of example of this. Can anyone help to explain, preferably with examples? Thanks, Sabrina
Sabrina, it depends on what’s given in the problem. I presume that you’ll have to be given enough info to somehow calc the ROE. Perhaps you struggled with recognizing/calcing necessary components and calcing the ROE with the info given? We’re reviewing ratios today, so hopefully a problem like that will come up.
s_sabiran, you need the firm’s equity multiplier to convert ROA into ROE. Let’s reexamine the basic DuPont equation: ROE = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity) I’d be surprised if your CFAI volumes or third-party study solution didn’t mention that the product of the first two quotients is ROA, i.e. ROA = (Net Income / Sales) * (Sales / Assets) = Net Profit Margin * Total Asset Turnover So the actual CFA exam question must have given evidence of the firm’s degree of leverage, in addition to information about the earnings retention rate (or dividend payout rate). I remember these sorts of questions typically try to be tricky with the calculation of either the earnings retention rate or return on equity, but not both in the same question, that’s just cruel. Good luck this December.
just like hiredguns1 said: ROE = ROA*(Assets/Equity) = ROA*(Financial Leverage)
Hi Guys, Thanks a lot. This is exactly what I was looking for. Happy studiying. ss
Is financial leverage or Equity multiplier are one and same (Assets/Equity)?
yes, chinni, it’s the same thing.