C2 #50

[Anonymous]

What's wrong with this solution?

In the Finance book, it says:

ROE = EPS/Book equity per share

Now, divide both top and bottom by the number of share, we get

ROE = Earning/book equity = 10%

Since SOA asks us to follow that book, this solution cannot be wrong.

[Dr T Non-Fan]

It appears that you should use the average book equity, which would be 6,500, in the denominator.
Re-check the book to see what you should use if the equity has changed over the year.

[Anonymous]

Thanks for the direction.

I guess thinking as a Mathematician is not good for these kind of test.

That's too bad

[Dr T Non-Fan]

Even a mathematician needs to know the exact definitions before she can proceed.

[Anonymous]

It's true!

[Dr T Non-Fan]

I don't have the Finance book with me, but I might have it tomorrow. I'll look through.

Matter of fact, I was thinking the answer should be A, since you're supposed to use the Equity(BOP). That's how I was learned.

(Also, that certainly is a lot of information when you use only three numbers of it.)

[Dr T Non-Fan]

1. Page 68 of B-M:
ROE = EPS/(book equity per share)

2. Seems to be different from Page 829 of B-M:
ROE = earnings / average equity

I couldn't find a definition for "book equity per share." I can't think of a nice way to define it so the answer is the same as taht of the second formula.