Question

At the end of the fiscal year ending 31st December 2018, MCS & Co reported common equity of 649 million on its statement of financial position with 490 million invested in financial assets (in the form of cash equivalent and short term investments) and no financing debt. For the fiscal year ending 31st December 2019, the company reported 74 million in comprehensive income of which 11 million was after tax earnings on the financial assets. This month MCS & Co is distributing 340 million of financial assets to the shareholders in the form of special dividends.Holding all else constant, what would be MCS & Co ROCE after the payout of the 340 million as special dividends.

Answer 1

Following information are given in the question:

Common Equity = 649 million

Financial Assets = 490 millon

Comprehensive Income = 74 Million

After tax earnings on financial assets included in comprehensive income = 11 million

Divident to be distributed = 340 million

ROCE of MCS & Co

ROCE or Return on Capital Employed is a financial metric to measure of how efficiently a company utilizes all available capital to generate additional profits.

ROCE = Earnings before interest and tax / Capital employed * 100

(Earnings before interest and tax is the same as Operating profit )

Operating profit = Comprehensive Income + Income on financial assets = 74 million + 11 million = 85 million

Capital emploiyed = 649 million

Return on capital employed = 85 million / 649 million = 13.10%

The dividend distribution of 340 million of financial assets does not impact the operating profit and also the capital employed (equity). Thus the dividend distribution has no relevance for calculated ROCE.