# ROE calculation - help

Just missed a question in CFA on-line for the following:

They give 2013 P/L and 2013-2012 B/S. They ask for 2013 ROE.

1. Which Equity should we take? To me it seems reasonable to take beginning value of Equity, which would be ending year 2012 in this case. The answer takes 2013 Equity which I don’t fully understand.

2. Which concepts do you consider? The lines given are:

• Common stock 100

• Retained Earnings 20

• Notes Payable 30

• Long term debt 60

• Total liabilities and equity 150

I chose to take total liabilities and equity, and basically subtract liabilities, which gives a figure that does not match with Common stock + RE. They took these two though…

Thanks for any help.

Topic Exam: Equity - Alahtab

1st Question.

Thanks!

Actually in this case they have taken the average equity & it’s 800 as 2012 & 2013 has same common stock of 800.& the retained earnings should be of the latest year.

Hope this hepls you

Agree with either taking beginning or average, and maybe they wanted to take average (u don’t know since it’s the same figure) but for sure they took end RE, which is 159.3.

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b = 1 – Payout ratio = 1 – (48/120) = 0.6

So,

g = b × ROE

ROE = Net income/Shareholders’ equity = 120/(800 + 159.3) = 12.5

g = 0.6 × 12.5 = 7.5%

D0 = \$48 million/50 million shares = \$0.96/share

V0 = (0.96×1 + 0.075) / (0.11 – 0.075) = \$29.49