Financing and interest effects on ROCE

Steps:

• Recall ROCE = (Profit before interest and tax / Capital employed) × 100, where capital employed = total assets - current liabilities.
• Change 1 increases non-current assets and long-term debt (debentures), raising capital employed without guaranteed profit rise, lowering ROCE.
• Change 3 raises interest expense on overdraft, reducing profit before interest and tax, directly lowering ROCE.
• Changes 2 and 4 either counteract the decrease or are not primary drivers per the scenario.

Why B is correct:

• Per ROCE formula, new debentures (change 1) inflate capital employed, while higher overdraft interest (change 3) cuts profit, both reducing the ratio.

Why the others are wrong:

• A: Change 2 (higher current liabilities) reduces capital employed, potentially raising ROCE.
• C: Change 2 would increase ROCE; change 4 affects profit but pairs incorrectly.
• D: Ignores change 1's capital impact; focuses only on profit reduction.

Final answer: B