Fall 2017 Q25 a.
For the RoE calculation, are we assuming that there is 0 tax paid on the net income since no information is given?
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For the RoE calculation, are we assuming that there is 0 tax paid on the net income since no information is given?
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Net income already takes into account income taxes so you wouldn't have to assume anything here
Can you take another look at this, please? I feel there are errors in both sample answers in the examiner reports.
From my understanding:
Sample answer 1: As dogechow points out, they assume no tax since NI is calculated here and not given
Sample answer2: Assets in the adjusted investment yield formula are supposed to be invested assets, not total assets, which are not given.
Please let me know if my understanding is correct in the shortcomings of the examiner report answers.
Thanks!
For the examiner reports, they are actual answers that either scored full marks, or a good solution that obtained most but not all the marks.
I am not sure whether sample 1 falls in the latter case, but you are right that they are missing the income tax component, so if I had to guess this is a almost full mark but not quite solution
It seems like the CAS actually had sample 2 in mind when they wrote this question, but most people defaulted to sample 1. This is because using the ROA formula gets you NI after tax.
ROA in the MSA paper just says net after tax income as a % of average beginning and end of year assets. Total assets seems fine to me here
Aah thanks for the insight that makes sense! My biggest issue was with sample 1 but I believe in sample 2 they still actually missed the invested assets in the investment yield formula (and not the ROA formula):
Thanks!
A lot of times exams are about being street smart - Yes it should be invested assets, but if invested assets are not available, what's the most logical item to use based on what is given?
Thanks!