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Hi John,
When using the ROCE formula we use equity and long term debt for the capital employed so my question is do we only use share capital or reserves too?
Also in gearing i have the same concern that what will be included in debt and what in equity like resreves etc and preference shares.
Thanks,
FurqanWhen using market value of equity we dont include reserves but we do in book value?but what if it doesnt mention whether to use market value of book?and what about preference shares where do we include them?
For you first question, equity is share capital plus reserves.
When calculating gearing, if you are asked to calculate it based on SOFP values then you use capital and reserves from the SOFP.
If we are calculating it based on market values (which is more likely and is more realistic) then the market value of equity effectively already includes reserves (the retained earnings are the most obvious reason for the market value being higher than the SOFP value).
This is explained fully in my free lectures on this.
In both cases preference shares are included. If they are irredeemable then they are added to equity. If they are redeemable then they are treated as long-term debt.
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