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Profit before tax is 220000
Total equity is 3150000
A loan of 1000000
Bearing interest rate 8% p.a
What is pre tax return on capital employed ?….
A divisional manager control assets of 600000
Other assets valued at 100000 are traceable to division
The controlable profit for division is 80000
Cost of capital is 8%What is residual income …
Is answer is
$72000Do not just set me questions.
Say where your problem is and then I will try and help,
(I assume you have watched our free lectures on these topics?)
sir,in the 2nd question what should we take as capital investment, 600000 or 100000?
Farzana: Please do not answer questions in the Ask the Tutor Forum – you are not the tutor (and your answer is not correct).
The interest is 8% x 1000000 = 80,000
So the profit before interest and tax is 220,000 + 80,000 = 300,000
So the ROCE = 300,000 / (3,150,000 + 1,000,000) = 7.23%Second question: How on earth can the capital investment be 100,000?
It is 700,000.
So the RI is 80,000 – (8% x 700,000) = 24,000
if we r taking profit before interest then y r we adding the interest? before tax and interest means without tax n interest.m i wrong?
and y we multiply the interest with loan only y not with equity as well?
and sorry sir.next time i wont reply here.Awww confusing any way i pass my f2 today with 69%
…
Thanksssss open tution n AllFarzana: the question gives the profit before tax. For ROCE we need the profit before interest and tax, so we need to add the interest.
Interest is only payable on loans – we do not pay interest on equity!!!!Rukhsar Hussein: That is great news that you passed. Many congratulations 🙂
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