MSA Ratio - 2017 Fall #25 Part a
in MSA.Ratios
The question did not provide tax, so net income calculation is kind of confusing.
Sample solution 1: just suppose there is no tax;acceptable but
Sample solution 2: use given investment yield to get beginning asset and use given ROA to get net income. However, the solution used total asset instead of invested assets, to me, it is not correct to way to do it.
Just want to confirm if I understand the ROE calculation and Investment yield calculation right.
Thanks,
Comments
You're right. They implicitly assume that the tax rate is 0 so that NI = NI after tax.
Furthermore, for solution 2, they also implicitly seem to assume that total assets = invested assets (i.e. all assets are invested). Without this assumption, the calculation of invested assets at the beginning of the year does not seem possible.
Solution 1 seems more reasonable.
It would help if we were provided what Invested Assets are:
Note: this seems to mean that "long term investments" are excluded. As a result this cannot be calculated by simply looking at the Page 20.10 of the P&C-1. So there's no obvious way to get "invested assets" unless given. And it a big stretch to assume assets in RoA is the same as adjusted yield.
The question should've just stuck with "yield" as found ion Line 46 of page 10.60.
In either case, we are provided with
RoA = 2.73% and Yield = 1.93% we should first and foremost try to use these input to solve the problem (using assumptions for non-provided data). This makes Sample 1 - very poor (assumes tax = $0, which is clearly wrong). Problem is the user didn't have enough information so they had to make a assumption somewhere.
Of you review 25B carefully you'll note liabilities for "Overall Leverage Ratio" do not remove ceded liabilities (to calculate net liabilities).
Remember:
1. sample solutions are "sample answers from candidates that received full marks"
2. solutions are not the official rubrik
3. There will be questions with errors (make best possible assumptions).