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a) Year 2 ROCE = $400k / $1,000k = 40%
Year 1 ROCE = $360k / $800k = 45%
b) ROCE is an efficiency ratio that measures the monetary performance of a firm compared with the amount of capital invested. In Year 2, JKL returned 40% from the value of the firm, i.e. for every $100 invested in the firm $40 is generated as profit (before interest and tax). The ratio has fallen by 5% suggestive of poorer use of the firm's capital, i.e. deteriorating efficiency. Profitability can be moderate by comparing to bank interest rates (40% is relatively high when compared to any bank deposit rate) or benchmarking against JKL's nearest rivals. The ROCE for both years is likely to be significantly higher than the financial institutions / return from savings offered by banks.
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discuss cost of capital in finance#
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