 # ROE formula

Where did this formula come from? ROE = (operating profit margin x total asset turnover - interest expense rate) x leverage ratio x tax retention rate I didn’t see this derived anywhere in Schweser… I’m only seeing it now in the Concept Checkers answers. Also, for those that have already written… how often did you have to calculate ratios? In the Schweser questions, they provide a paragraph with certain numbers & you’re asked to calculate a ratio. Do they do that on the actual exam?? Thanks!

cfa08 I know what you’re talking about. I would say add the formula you just mentioned to the list of formulas to memorize. You never know. For me, I was able to solve ROE questions mostly with the formula you list, but on the actual June 08 test there was a question that required knowledge of the ROE formula that uses the Tax Burden, Interest Burden, etc.

You should be able to derive it yourself (although I thought Schweser went through it). I highly recommend you know all forms of ROE.

ROE = NI / CE = (EBIT - Int) * (1-T) / CE = EBIT - INT * (1-T) ------------ CE = EBIT - Interest * TA * (1-T) ----------------- — Total Assets CE = EBIT * Net Sales - Int * Total assets * (1-T) ------ ------------ ---- ------------- Net Sales Total Assets Total Assets CE = [Operating Profit Margin * Total Asset Turnover - Int Coverage] * Financial Lev * Tax retention QED Edited: Does not look as pretty when posted. but you get the general idea. Edited 2: [(EBIT/NS * NS / TA ) - (Int/TA)] * TA/CE * (1-T) CP

CP, Great Explanation…As always… Thank you !!

there are like 8 ways to get ROE, know em all. that is all i can say. they are in the FSA book, obviously, but if you have the laminated hint sheet from SCHWSER, they list most of em there. ROA also has 2 or 4 tricky derivations