Return on Capital: Do you use total Assets or Shareholder's Equity?

Source: 2010 CFA level II mock exam morning, question 13 (I’m assuming this is public information to the users of this forum) The answer basically takes EBIT and divides it by the average capital. For capital, they use Total Assets. 2009: EBIT 2009 / (Total assets 2009 + Total assets 2008)/2 2008: EBIT 2008 / (Total assets 2008 + Total assets 2007)/2 I’ve seen capital refer to Equity. What is the CFA definition for capital? I’ve looked in the digital version of the files but so far no luck.

capital is equity + interest bearing debt. In this case it must just be all assets. I don’t have it in front of me but look at the breakdown and see if everything (all assets) should be included. If they don’t break out accounts payable or something then you use total assets. If they broke it out then things like A/P is not interest bearing so would not be included. Does that help?

Total capital is never just equity. Net assets is equity. Capital = Total assets = Debt + Equity

doesnt sound right

^ what doesn’t sound right?

the original post, and I would disagree that total assets = debt + equity, not all liabilities are debt?

unless they just had debt as liabilities in the Q then that would work

Ya, well I should have said liabilities instead of debt. You get the point. If it’s non-monetary current liabilities, it’s a part of NWC. Which again is capital.

> I’ve seen capital refer to Equity. What is the CFA definition for capital? As indicated above, in the CFA world “capital” generally refers to debt capital + equity capital. But you’re also right that “capital” can be defined like this: “Accounting: The remaining assets of a business after all liabilities have been deducted; net worth.” And if you’re talking about financial institutions or studying for your FRM or PRM, “capital” almost always means “equity capital”. Go figure. After a while you’ll get the hang of which usage is the default in your particular corner of finance.

Did you read my post? Capital is interest bearing debt + equity. DarienHacker Wrote: ------------------------------------------------------- > > I’ve seen capital refer to Equity. What is the > CFA definition for capital? > > As indicated above, in the CFA world “capital” > generally refers to debt capital + equity capital. > > > But you’re also right that “capital” can be > defined like this: “Accounting: The remaining > assets of a business after all liabilities have > been deducted; net worth.” And if you’re talking > about financial institutions or studying for your > FRM or PRM, “capital” almost always means “equity > capital”. Go figure. > > After a while you’ll get the hang of which usage > is the default in your particular corner of > finance.