ROE - Do you use average equity or just plain equity

CFA Level II
#1

I am calculating the sustainable growth rate :

g = ROE x RR

I got the question wrong because I calculated ROE = Net Income/Average Shareholder’s Equity. The solution simply used Shareholder’s Equity for the year.

#2

It should be average equity in practice.

But I noticed that CFAI uses end of year in all their ratios. Including current asset/liabilities turnovers.

Only EVA and RI models use beginning values of IC/BVE.

#3

Me too i got wrong, bt the basic concept is that when you compare financial position item and income statement item, financial position item should be on average but this problem have found it in calculating ROE may be their is an exception for ROE not to use average because it uses many components like

Tax burden

Interest burden

Operating profit margin

Asset turnover and

Financia leverage

Any one with an idea pls help

#4

avg equity if they remain silent

#5

Work in the reverse through the answers. You can use the answers judiciously, especially “implied growth rate”.

#6

Hey Blackschole,

I feel it isbetter to stick with what you studied in the CFAI text as it is safer to err on the side of caution. Caution here is the CFAI text.

#7

If they give you inputs for Dupont in the question i would use that to calculate ROE