"Average Total Invested Capital" in the "Return on Total Invested Capital" ratio computation

Could anyone tell me what all should we count in computing the “Average Total Invested Capital” in the “Return on Total Invested Capital” ratio computation?? Anybody having Passmaster can refer to question number L1-01648 (Study Session - 8) - Dinesh S

IIRC it’s l-t debt, and equity.

Hey Dinesh, Avg Capital is just Avg Assets… looks like you have to use (beg. balance + ending bal)/2 if you’ve got schweser notes, see FSA, page 84

Bluey, I have the exact same understanding as you mentioned above, but Passmaster has done something like this. The Avg Total Invested Capital = [{Total Assets(2001) - Account Payable(2001)} - {Total Assets(2000) - Account Payable(2000)}]/2 Why did this Account Payable come into picture all of a sudden? - Dinesh S

also check page 86 “professor’s note” It says it can be either l-t debt + equity or total assets, and that the CFA exam will probably say “total capital” if it wants total assets, or “total long-term capital” if it wants l-t debt plus equity.

thanks for the reminder chris… so im guessing, pass master is using Total Assets minus A/C Payable since it only wants LONG-TERM CAPITAL (since a/c payable is a short-term debt, it must be talen away)

Precisely. I suppose you could take “invested” to mean long term, but life’s too short to agonise. Joey said that the exam questions would be clear, and Joey’s word is law :wink:

i sure hope so… i hate ambiguous questions… but if it does come up in the exam, then im lucky i read this thread… =) (note to self: invested means long-term)

The “Professor’s Note” on page 86 has cleared all my doubts… and hope that we see clearer questions on the exam. Here’s the crux of the para… “Total Capital” = “Total Assets” “Total Long-Term Capital” = “Total Long-Term-Debt + Equity”

Bcoz it is Total invested capital, we may have to include the itnerest expense as well since we are also considering the creditors in this case.