Sept 2006 no 20

[nad07]

How has the return on investment been calculated??

 

[nad07]

I'm actually struggling with all the ratios. I did manage to prepare the p&l and balance sheet though. Can someone help pls?

P.S I'm using the online answers

 

[Stuart Underwood]

First of all, make sure you know the ratios thoroughly, including:
- you can write down the formulae
- you can calculate the ratio from the formulae
- if you are not given all info you'd ideally like, you can still use what you are given to calculate a meaningful ratio.

Calculations for 2005 (make sure you can repeat them for 2004):

The Examiners calculated the return on investment using an alternative method to the one in the notes, as follows:
= profit after tax, interest and preference share dividends / Market value of the company
= 120/(300*2.25) = 120/675 = 17.8%

The 120 in itself is a complex calculation.
To do it:
- take sales revenue of 2600
- deduct cost of sales =opening stock + purchases - cost of goods sold (check you get 1940)
- deduct expenses incl interest on debentures (474)
- deduct tax (54)
- deduct pref share dividends (12)

Hope this helps.

Best wishes
Stuart

PS The ASET takes you through each of these calculations for all the ratios step by step. Far too cumbersome for me to write the entire ASET solution out here (+ it's copyrighted!). You can order ASET for earlier papers if you need to, by contacting ActEd@bpp.com

 

[nad07]

Thanks a lot for your reply. The return on investment is no longer as part of the Core Reading right?

 

[Stuart Underwood]

It is more usually described as "Return on capital employed", the formula for which is given in the Core Reading.

 

[nad07]

Thank you for your help!!!