ROE

CFA Level I FRA
#1

In ROE calculation do we have to average total equity?

In one of the schweser example, they have averaged it, and in another they haven’t. Below is explanation.

Return on equity is equal to net income divided by average total equity. Since this ratio mixes an income statement item and a balance sheet item, it is necessary to convert the common-size inputs to dollars. Net income is $11,211,200 ($215,600,000 × 5.2%) and _ average equity is $41,772,000 _ [($95,300,000 × 48.0%) + $37,800,000] / 2. Thus, 2007 ROE is 26.8% ($11,211,200 _ net income _ / $41,772,000 _ average equity _).

#2

For ROE, use average values. As a rule of thumb, anytime you’re dealing with “mixed” ratios, you use average values. There are some exceptions (residual income), but you don’t need to worry about these until L2.

#3

as the guy above me said…but if only the closing values are provided in the question and there is no way for u to calculate avergae values than u might use closing ones