Normalising ROE

CFA Level II FRA
#1

There was a Qbank question that gave 2 companies and their ROE’s

Then you had nonrecurring items for each company and then are asked to compute the new ROE.

Schweser then adjusted Net Income but left the previous Equity value as it was to compute the new, “normalised” ROE.

Is this approach correct? Aren’t I supposed to adjust Equity with the same value I adjust Net Income because of Retained Earnings?

#2

In Level 1, Equity is a BS item and is supposed to be ATE Average Total Equity but since the question assumes the Equity is Beginning Equity, then so be it.

Here I think ROE means the NI ie. the return on Beginning Equity…pretty much like the Residual Income model, so I guess it’s ok.

#3

Nice one. Thx!