Anyone else make a mistake confusing them while taking notes or making notecards?
ROE = Return on Equity…
r = Required rate of return on equity…
2 very different things…
I have made that mistake ina mock lately.
the way I think about it, is: if you have the wording say Required Return on Equity that is your cost of equity (ke) in my formula and ROE must can usually be solved by NI/Equity or NI/Book Value (of the t-1). At least for this purpose,
RI = (ROE - Ke) x BV(t-1)
otherwise if they give you ROE, we may have to find ke (ie Required return on equity) = using CAPM (ke = rf + beta (rm-rf))…
Thanks Phil. Residual income seems easy enough but really tricky at the same time