- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
.
- Posts
BPP Mock 1 F7 Revision Kit has the following question:
Monty had profit before tax of $3 million for the year ended 31 March 20X3, after charging loan interest of $150,000 and interest on a finance lease of $250,000. Extracts from the equity and liabilities section of the
statement of financial position of Monty at 31 March 20X3 are as follows.
$’000 $’000
Total equity 12,550
Non-current liabilities
8% loan notes 1,400
Deferred tax 1,500
Finance lease obligation 1,200
4,100
Current liabilities
Finance lease obligation 750
Trade payables 2,650
Current tax 1,250
4,650
What is the return on year-end capital employed?
A 16.3%
B 21.4%
C 18.6%
D 24.3%
The solution given is:
$’000
Return (3,000 + 150 + 250) 3,400%
Capital employed (12,550 + 1,400 + 1,200 + 750) 15,900
= 21.4%
I do not know how they can derive $750k to arrive at the figure 15,900 of total capital employed. I think it must be 1,500 and total capital employed is 16,650
Please help me to verify this!
Thank you!The $750 is the finance lease current liability – its NOT the deferred tax long-term liability
Capital employed is, in other words, the money derived from one source or another that has been employed in generating profits
Share-holders’ funds? Certainly
8% Loan note? Of course
Finance lease liabilities? Obviously
Deferred tax? Er, no! This is merely a debt that MAY at some time in the future have to be paid. It’s not really funds that have been made available to MontySo although ROCE is sometimes said to be PBIT / share-holders’ funds + long-term liabilities … you now need to start considering what is the nature of the long-term liability. If it’s deferred tax, then it isn’t really capital that is employed by the company to generate returns
Better?
- The topic ‘Return on capital employed’ is closed to new replies.