Can anyone explain me how we come to this formula? ROE = [(Operating Profit Margin x Asset Turnover) - Interest Expense Rate) x Leverage Multiplier x Tax Retention Rate] I don’t have CFA Text books at the moment and there is not any explanation given in Schweser notes.
i’ll give this a go, i am not sure this is 100% correct, but hopefully it will make enough sense, ROE=net income/ total equity ROA=net income/total asset ROE=ROA x total asset/total equity total asset/total equity is leaverage ROE=ROA x leaverage or ROE= (net income/total asset ) x leaverage or ROE= (net income/revenue x revenue/total asset )x leaverage= profit margin x asset turnover x leaverage. or (from here i am not so sure) ROE = NI/EBT x EBT/revenue xasset turnover x leaverage= (EBT/revenue)x asset turnover x tax retention x leaverage =EBT/revenue x revenue/total asset EBT= EBIT-interest (EBIT used interchangably with operating profit) ROE= [(EBIT-Interst)/revenue]xasset turnover x tax retention x leaverage ROE= [(EBIT/revenue)- (interest/revenue)] x asset turnover x tax renetion x leaverage =[(EBIT x asset turnover /total asset)*- (asset tuenover xinterest/total asset)*]x tax retention x leaverage *(EBIT/revenue) x asset tunover = operating profit margin x asset turnoverrate since EBIT is used interchangably with operating profit *asset turnover x interest/ revenue = (revenue/total asset) x (inerest/revenue)= interest/ total asset- i presume this is the “interest expense rate” so you have the equation in your original post.
Lol… To be honest i dun get it all… But it has given me some clue… I’ll try it myself now… Lets see if i can get it… Thanks anyway! 
Lol… To be honest i dun get it all… But it has given me some clue… I’ll try it myself now… Lets see if i can get it… Thanks anyway!
ROE=NI/CE = [(EBIT-Int)*(1-T)]/CE = [(EBIT-Int)]/CE * (1-T) = [EBIT-Int]/TA * TA/CE * (1-T) = [EBIT/TA - Int/TA] *TA/CE * (1-T) = [EBIT/NA * NS/TA - Int/TA] * TA/CE * (1-T) = (Op Margin * Total Asset Turnover - Int Exp. Rate) * Financial Leverage * Tax Retention.
Very Nice… Thanks!