Dividend Payment Increases ROCE by Reducing Closing Capital Employed

Steps:

• ROCE = Profit for the year ÷ Closing capital employed (equity + non-current liabilities).
• Both firms start with $100,000 share capital and no debt; assume identical profits before dividend.
• AB's dividend reduces retained earnings (part of equity), lowering its closing capital employed.
• CD retains all earnings, keeping closing capital higher.
• Same profit numerator but smaller denominator for AB yields higher ROCE.

Why A is correct:

• Retained earnings form part of capital employed; dividend reduces this without affecting profit numerator, increasing ROCE ratio.

Why the others are wrong:

• B: Smaller capital employed raises ROCE, not lowers it.
• C: Dividends are profit appropriations, not expenses reducing profit for ROCE.
• D: AB's lower closing capital from dividend creates different ROCE.

Final answer: A