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5. The Return on Capital Employed (ROCE) for VJ has reduced from 21.6% 0/2 to 15.4% in the year to 31 March 2015. Which of the following independent options would be a valid reason for this reduction?
(1) Repayment of a long term loan
(ii)A large tax bill accrued
(iii)Major investment in intangible assets just before the reporting date
(iv)An upwards revaluation of land in the year
A. (i) and (ii)
B. (i) and (iii)
C. (ii) and (iv)
D. (iii) and (iv)Again, you need to let me know what you are finding to be the challenge with the question. I am not here to just answer questions that you throw at me. You need to attempt them first, let me know where you are struggling and then I can happily help.
Thanks
The answer given was option D, can you please explain the reason. I got option C.
(iii)Major investment in intangible assets just before the reporting date
This statement is correct because an investment in intangible assets means an increase in total assets. We can also calculate Capital employed as Total assets less current liabilitiies. And hence capital employed increases and ROCE falls.
(iv)An upwards revaluation of land in the year
This option is correct because an upward revaluation increases the revaluation surplus and hence the capital employed increases. And hence the denominator increases. This results in a fall in ROCE.
And it will not be (ii) in your initial answer of C as the large tax bill being accrued, although it will reduce the PBT as the tax expense increases, will not reduce PBIT. PBIT is the figure that is used in the ROCE calculation and so if it has not changed then it will not have the impact of decreasing the ROCE.
Thanks
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