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Question 3.4: Because ROE and ROA are usually intended to measure performa...

Because ROE and ROA are usually intended to measure performance over a prior period, it makes a certain amount of sense to base them on average equity and average assets, respectively. For Prufrock, how would you calculate these?

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We first need to calculate average assets and average equity:
Average assets = ($3,373 + 3,588)/2 = $3,481
Average equity = ($2,299 + 2,591)/2 = $2,445
With these averages, we can recalculate ROA and ROE as follows:
ROA=\frac{\$363}{\$3,481}=10.43%

ROE=\frac{\$363}{\$2,445}=14.85%
These are slightly higher than our previous calculations because assets grew during the year, with the result that the average is below the ending value.

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