Idiotic question, but can ROE be calculated with beginning BV of Equity?

CFA Level II
#1

I always thought it was NI/Avg. BV of Equity, but there’s a question (question 40 Schweser practice book 2, Exam 1 2013) which asks if multiplying the ROE to the justified leading P/E would lead to justified P/B, where ROE is defined as net income divided by beginning book value of equity. Apparently this is right according to the answers, but I am very sceptical, please let me know whether I’m right. Shouldn’t ROE be calculated by NI/Avg. BV of Equity?

Thanks

#2

I believe the material explicity states it should be the beginning.

It is in the curriculum

#3

thanks man, there’s just so much information that its very easy to get confused you know?

#4

When calculating residual income, use beginning BV of equity to calculate ROE.

In all other applications, use average BV of equity.

#5

Yes, the ending BV of equity will have the NI in form of retained earning.

Hence it would be wrong to do that, its about earning on what you alreayd have.

#6

In the GDM when evaluating the sustainable growth rate g = ROE x RetentionRatio, you also have to use the Beginning Equity for ROE. I saw it in March Mock Exam AM Q43. It’s very confusing to sometimes use average and sometimes beginning Equity, ROE should have a different name in each case, I suggest: ROE (average) vs trailing ROE (beg. Equity)

#7

heres a tip i’ve heard from a few sources: When CFA questions do not mention anything: Always using beginning of the year values for anything on the balance seheet.

Also, Beginning book value of equity… isn’t book value = equity?

#8

Usually they won’t give you two years’ balance sheets, so you’re stuck using whatever they give you. Thus, even though ROE is normally calculated using average equity, you’ll have only one equity number; use it and don’t look back.

#9

In the CFA mock exam morning session, the Macharia Case question 1 asks you to apply the Gordon Growth Model and you must calculate g to do so (ROE*retention.) In their answer they calculate ROE using 2013 net income / 2013 ending equity even though 2012 equity is included in the case.

It really pissed me off because I’m sure we should be usuing average equity and I was stuck on that question for a long time, certain they were trying to trick us with a foolish calculation of growth.

Calculating ROE with average equity still led me to choose the correct answer because it was closest.