Hi All, I am having trouble understanding how the ROCE has been calculated for both companies. I understand that the ROCE = post-tax profits divided by free reserves. So in the context of the Q, looking at Company A for e.g.: Post-tax profits = £-57.0m (assuming no tax) Free reserves = Total Assets - Total Liabilities = 403 - 223 = £180m Hence I thought the ROCE is -57.0 divided by 180 = -32% However the solutions have -24% Assuming the free reserves are correct at £180m, this would imply post-tax profits are then -£43.2m Thanks in advance!
Hi Benoy When calculating the ROCE you should use the Free Reserves (or SHF) at the start of the year and not the end of the year, as this is the capital that the shareholders have "lent" you for the year in question. In their solution, the examiners have assumed no dividends are paid out so that the Free Reserves at the start of the year are 180 - (-57) = 237. This gives ROCE = -57 / 237 = -24%. The examiners are likely to have awarded credit for other sensible assumptions and calculations which are consistent with that too.
