# Some FSA questions

wow that is a long post - - I think I have seen this before though “[(EBIT/S)(S/A)-(I/A)]” in L1 threads, try searching “ROE”

^ Yeah, they seem long because I had to write out a lot of the text from the notes, but they’re not particularly difficult questions…I think…haha! Thanks for the ROE tip, I’ll check that out and see if i find anything.

Answer to question 5 should be D Suppose Equity is 100 Assets = 1.9 * Equity =190 Sales = 1.8 * Assets =342 EBIT = 10% * Sales =34.2 Interest = 2% * Assets =3.8 EBT = EBIT – Interest = 30.4 Tax = 40% *EBT = 12.16 NI = EBT – Tax =18.24 ROE = 18.24/100 =18.24%

sameeragarwal Wrote: ------------------------------------------------------- > Answer to question 5 should be D > Suppose Equity is 100 > Assets = 1.9 * Equity =190 > Sales = 1.8 * Assets =342 > EBIT = 10% * Sales =34.2 > Interest = 2% * Assets =3.8 > EBT = EBIT – Interest = 30.4 > Tax = 40% *EBT = 12.16 > NI = EBT – Tax =18.24 > ROE = 18.24/100 =18.24% I can follow your logic in the above calculation, but where did you get that from? That method of calculating ROE isn’t in the notes

brafique Wrote: ------------------------------------------------------- > > In both of these questions, the formula used is > ROE = (EBIT/S)(S/A)-(I/A)(1-t). Why is the > first part of the equation [(EBIT/S)(S/A)-(I/A)] > as opposed to [(EBIT/S)(S/A)(I/A)]? > > There is no mention of subtracting I/A anywhere in > the chapter. Why would you multiply the “interest > burden” (EBT/EBIT) against the rest of the > equation to get the ROE, but subtract out the > “interest expense” (I/A)? It seems like a simple > thing that might trip me up on the exam! > > ------------------------------------- I may have an engineering-type bias in approaching your question, but hopefully it helps. The easiest way I can see to explain why it is not [(EBIT/S)(S/A)(I/A)] is just to look at the math. By multipling by I/A, you end up with EBIT * Interest / Assets^2 which is meaningless. By calculating [(EBIT/S)(S/A)-(I/A)] you are getting EarningsBIT/Assets - Interest/Assets which is equivalently EarningsBT/Assets. Then the multiplication by Assets/Equity takes you to EaringsBT/Equity, and finally multipling by (1-t) takes you to Earnings/Equity. Hope this makes sense… hard to explain my type of thinking in words.

For the equation: NI = (EBIT-Int)(1-T) <= does that look familiar? ROE = NI / CE So = (EBIT - Int ) (1-T) / CE = (EBIT-Int) / TA * TA/CE * (1-T) = [(EBIT/S)(S/TA) - Int/TA] * TA/CE * (1-T) or in Long form [Operating Profit Margin * Total Asset Turnover - Int Coverage] * Financial Leverage * Tax Burden

Answer to your Q1: A = L + E. Now, think what E (Equity) is made off? E is a sum of RE and CS (Contr. Surplus) A = L + (RE + CS). Mathematically, RE = A - L - CS Similarly, L = A - RE - CS. CS is not the same as Income. CS is capital from shareholders, NI is a result of operational, financial or investing activities. Distribution to owners is not an Expense – it can take a form of dividends (taxable or non-taxable, i.e. Capital Dividends) or Loans to Shareholders. :)))

i just assume the lowest of the figures to be 100 and try to arrive at the rest of the figures, i m bad at memorizing formulas, thats why this long approach