doesn’t how much interest being paid show an indication of management? or is because the larger the capital employed (the denominator) the greater the negative effect on the percentage anyways? Am i making any sense? What i am trying to understand really is how come the interest is not included? Isn’t the avoidance of high interest a performance measurement?

But it is not a measure of how well the company is using the long-term capital. The long-term capital is a mixture of equity and debt borrowing – it needs to generate profits in order to pay dividends and pay interest.

Hi Mr.john Most books give this formula like as Long-term debt/ Capital employed but you only divided the Long term debt by Equity? why didnt you add long term debt to equity?

hello sir, as you say in calculating the Receivables/Payable days the most accurate way to take an average of them.so why not we doing this in above example although we’ve closing Receivable/Payable for 2007 as well as closing balances for last year 2006 which become the opening balance for this year. thanks.

I suppose that you can go through them without looking at the previous chapters first. However it makes more sense to go through all the chapters in number order – they are arranged so as to be a complete course for Paper F2.

Please dear Sir: I dont understand the difference between: RETURN ON CAPITAL EMPLOYED and R.O.C.E : isn´t it the same? because you measure the ROCE as assets turnover x net profi margin. Thanks.

Yes it is the same. It is not measured as asset turnover x net profit margin. It is measured as profit before interest and tax (net operating profit) as a percentage of capital employed. It is equal to asset turnover x net profit margin, but that is not how it is measured!

Sir, help me. An investment division earns a return on investment of 15% and a residual income of $200,000. The cost of capital is 18%. A new project gives a return on capital employed of 16%. If the new project is accepted, what will happen to the division’s return of investment and residual income?

Why does the return on investment and the residual income increases?

ROI increases because project gives 16% which is more than the current 15%.

RI decreases because the project return is less than the cost of capital.

Why have you posted this question beneath this lecture??? The question is on divisional performance. Please ask questions in the F2 Ask the Tutor Forum – not as a comment on a lecture.

Hello …can u help me clarify the asset turnover formula? 1_ asset turnover: sale/ nca Or 2_ asset turnover: sale/total asset Or 3_asset turnover: sale/capital employed ? 4_asset turnover: turnover/capital employed. Which of this above should we use in the exam ?

Usually, asset turnover is sales/total capital employed.

Turnover and sales are the same thing. Capital employed = equity + non-current liabilities (which is always equal to (total assets – current liabilities))

It can be looked at in more detail by calculating sales/non-current assets. However only do this if the question specifically asks for it. Otherwise calculate as per my first line.

Can u please help me with this question. u might need to walk me through it. Using an interest rate of 10% per year , the net present value (NPV) of a project has been correctly calculated as $50.00. If the interest rate is increased by 1% the npv of the project falls by $20.00

What is the internal rate of interest of the project

loukasierides says

is this the interpretation of financial statements lecture from F3?

John Moffat says

No, but it is the same because the syllabus for this bit is the same.

loukasierides says

thank you still great to study something not completely new

loukasierides says

Dear Sir,

doesn’t how much interest being paid show an indication of management? or is because the larger the capital employed (the denominator) the greater the negative effect on the percentage anyways? Am i making any sense? What i am trying to understand really is how come the interest is not included? Isn’t the avoidance of high interest a performance measurement?

John Moffat says

But it is not a measure of how well the company is using the long-term capital. The long-term capital is a mixture of equity and debt borrowing – it needs to generate profits in order to pay dividends and pay interest.

ajvir says

never mind, Thanks for all the great lectures

Rasad says

Hi Mr.john

Most books give this formula like as Long-term debt/ Capital employed

but you only divided the Long term debt by Equity? why didnt you add long term debt to equity?

John Moffat says

Sorry but most books give (or should certainly give) two measures of gearing – the ratio of debt to equity, or the ratio of debt to equity plus debt.

Because both are standard ways of measuring gearing, the examiner always makes it clear which of the two he is requiring in a question.

daud4328 says

Sir are these formulas given in the exam?

John Moffat says

No – you can see what is on the formula sheet by looking at the page in the free Lecture Notes.

enroluniabroad says

hello sir,

as you say in calculating the Receivables/Payable days the most accurate way to take an average of them.so why not we doing this in above example although we’ve closing Receivable/Payable for 2007 as well as closing balances for last year 2006 which become the opening balance for this year.

thanks.

John Moffat says

But then how could you fairly compare with 2006, when you do not have the opening balance for 2006?

There is no rule – in practice you do whatever you think is more sensible.

In the exam we normally use end of year figures.

Sammar says

Are chapters 24, 25 and 26 related to the previous chapters or can we watch them without having seen the previous few chapters???

John Moffat says

I suppose that you can go through them without looking at the previous chapters first.

However it makes more sense to go through all the chapters in number order – they are arranged so as to be a complete course for Paper F2.

jose says

Please dear Sir:

I dont understand the difference between: RETURN ON CAPITAL EMPLOYED and R.O.C.E : isn´t it the same? because you measure the ROCE as assets turnover x net profi margin.

Thanks.

John Moffat says

Yes it is the same.

It is not measured as asset turnover x net profit margin. It is measured as profit before interest and tax (net operating profit) as a percentage of capital employed. It is equal to asset turnover x net profit margin, but that is not how it is measured!

Erica says

Sir, help me.

An investment division earns a return on investment of 15% and a residual income of $200,000. The cost of capital is 18%. A new project gives a return on capital employed of 16%. If the new project is accepted, what will happen to the division’s return of investment and residual income?

Why does the return on investment and the residual income increases?

John Moffat says

ROI increases because project gives 16% which is more than the current 15%.

RI decreases because the project return is less than the cost of capital.

Why have you posted this question beneath this lecture??? The question is on divisional performance.

Please ask questions in the F2 Ask the Tutor Forum – not as a comment on a lecture.

Erica says

RI should decrease or increase?

John Moffat says

The RI will decrease

kimrong says

Hello …can u help me clarify the asset turnover formula?

1_ asset turnover: sale/ nca

Or 2_ asset turnover: sale/total asset

Or 3_asset turnover: sale/capital employed ?

4_asset turnover: turnover/capital employed.

Which of this above should we use in the exam ?

John Moffat says

Usually, asset turnover is sales/total capital employed.

Turnover and sales are the same thing.

Capital employed = equity + non-current liabilities (which is always equal to (total assets – current liabilities))

It can be looked at in more detail by calculating sales/non-current assets. However only do this if the question specifically asks for it. Otherwise calculate as per my first line.

kimrong says

Ok …now i got it thx u very much for your clarification.

John Moffat says

You are welcome 🙂

Fakhrul Iman says

Quite a good lecture. Thank u very much! 🙂

jackymunyi says

Who has an easy way to remember all those ratios??

sooner says

Thank you very much once again John Moffat.

Ps: thank for the correction – Rate of return

sooner says

Good night john moffat,

Can u please help me with this question. u might need to walk me through it.

Using an interest rate of 10% per year , the net present value (NPV) of a project has been correctly calculated as $50.00.

If the interest rate is increased by 1% the npv of the project falls by $20.00

What is the internal rate of interest of the project

thank you

John Moffat says

For the internal rate of return (not internal rate of interest) we want the NPV to be zero.

At 10% the NPV is 50. Since it falls by 20 for every 1% increase in interest, we need 10% to increase by 50/20 x 1%

abhinandhdileep says

IRR=12.5% ?

John Moffat says

correct 🙂

fizzanaqvi says

Are these fomulas going to be provided in exams or do we have to learn them?

John Moffat says

The formula sheet printed at the front of our notes is the sheet that you are given in the exam.

You are not given any other formulae.

lalithas says

Could you please with notes I am unable to down load the notes for the later chapters I am ok with the earlier ones

admin says

I don’t understand you

There is only one set of course notes

If you managed to download it

You have all the chapters

adnanaadi101 says

he speck very fast.. 🙁