# Normalized ROE ?

hi, I dont understand this one: why do we add to Net Income post-tax effect of non-recurring gain for firm A, but substract it for firm B ? for A: NI= 3.2+ .300(.64)- .400(.64) for B: NI= 16-2.6(.64) thanks! Question 26 - #87553 An analyst finds return-on-equity (ROE) a good measure of management performance and wants to compare two firms: Firm A and Firm B. Firm A reports net income of \$3.2 million and has a ROE of 18. Firm B reports income of \$16 million and has an ROE of 16. A review of the notes to the financial statements for Firm A, shows that the earnings include a loss from smelting operations of \$400,000 and that the firm has exited this business. In addition, the firm sold the smelting equipment and had a gain on the sale of \$300,000. A similar review of the notes for Firm B discloses that the \$16 million in net income includes \$2.6 million gain on the sale of no longer needed office property. Assume that the tax rate for both firms is 36%, and that the notes describe pre-tax amounts. What would be the “normalized” ROE for Firm A and for Firm B, respectively? A) 17.1 and 16.9. B) 18.4 and 14.3. C) 16.0 and 18.0. Your answer: B was correct! The ROE for Firm A is adjusted for the \$400,000 loss on discontinued operations and the \$300,000 non-recurring gain. The ROE for Firm B is adjusted to remove the effects of the \$2.6 million one-time gain.

You subtract gains and add losses…

FIRM A ROE = .18 = 3.2/E E = 17.78 Normalized NI = 3.2 + .400(1-.36) - .300(1-.36) = 3.264 Normalized ROE = 3.264/17.78 = 18.4 Your equation above is wrong. You added back gains and subtracted losses.

thanks Topher and sox ! stupid mistake: for whatever reaon, I had 17 as equity instead of 17.78…