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Hi ken
i don’t get this concept as explained in part iii of question 1.
“As ROCE is calculated based on
the return on total capital, it should not include financing costs and so profit before and after tax are not consistent with this
view”Total capital include long term loan. why it is saying in the argument that it should not include finance cost in its profit?
Broadly, a business has two sources of capital: equity and debt.
If it were all equity financed then ROCE is
Profit before tax and dividend/ Capital employed (= Equity = share capital plus reserves).
Dividends are a reward to shareholders, not an expense.
Alternatively, if the business were all debt financed, the ROCE would be
Profit before tax and interest/ Capital employed (= debt).
In this case interest is the reward to suppliers of capital and should not be regarded as an expense.
For mixed capital companies
ROCE = PBIT/Total capital employed.
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