Financial Management in Construction Sector

FINANCIAL MANAGEMENT IN

CONSTRUCTION SECTOR

Introduction

This report explores the main areas of financing and resource management in construction industry in relation to different types of business structures, financing strategies, organizational structures and resources. The goal of this study is to develop recommendations on efficient financial strategies for managing people at the workplace, decision-making and M&As, particularly A Ltd acquisition of B Ltd, taking into account the effects on the performance and productivity of the companies.

1. Legal Status of Building Companies

1.1 Forms of Business Organizations

A construction business can be of several types, each of which has different legal personality, responsibility and possibilities in terms of operations. Below are primary forms of business organizations:

Sole Proprietorship: Owned and operated by one person with full legal responsibility for all its financial obligations. It is easy to implement but comes with a high potential of being too personal. The owner had ultimate say on all business matters.

Partnership: It refers to a business entity operated by two or more people who share both the profits as well as the losses. Formations are great when starting a business as it pools expertise and assets, but partners are jointly and severally liable unless it is a LLP (Allen et al., 2021). More to that, partnerships enable a combination of professional skills pertaining to business management.

Private Limited Company (Ltd): It has limited liability for shareholders. It is a more effective structure because it is owned by a limited number of shareholders and not listed on the stock market. It should however be more applicable for mid to large scale construction companies.

Public Limited Company (PLC): Stock exchange Company which has possibility to accumulate a large amount of capital, having issued public shares. It has less legal responsibility for investors but is more controlled by rules. A PLC is suitable for large construction industry players who want to expand (Means, 2017).

Limited Liability Partnership (LLP): Similar to a partnership but with limited liability for the participants; protection while operation remains rather unhampered. This is especially the case with firms that have a theme of reducing personal risk most of the time.

1.2 Comparing Between Different Forms of Corporation

1. Sole Proprietorship vs. Private Limited Company (Ltd): A sole trader is easy to establish and engage it but exposes the owner legally while an Ltd is more complex and restricts the owner individually.

2. Partnership: Business entity operated by two or more people with equal responsibility in terms of profit and loss. The partnerships are best understood as when people merge skill and capital, but have legal exposure, other than in the LLP (Drucker, 2017).

3. Private Limited Company (Ltd): Limited liability is offered to the shareholders. The company is owned privately without floating shares in the market which is better and safer way to organize. It can be said to fit well with medium to large construction companies.

4. Public Limited Company (PLC): Jointly publicly traded for a higher ability to raise massive capital if the shares can go to the public. It grants limited liability but comes with more severe regulation necessities. A PLC is beneficial for the large construction companies especially those that require expansion.

5. Limited Liability Partnership (LLP): Also known as an LLP, it can be defined as a legal structure that blends the benefits of a partnership where people have limited liabilities, protective while remaining functional. It is especially beneficial for the firms, which objective is to minimize personal risk at work (Corwin and Ciampi, 2024).

1.3 Company Formation Process

Forming a construction company involves several key steps:

1. Name Selection and Registration: Registering a name which sets one apart from the other business and well as registering with the appropriate agencies for instance Companies House in UK.

2. Drafting Documents: Drawing up the Memorandum of Association and the Articles of Association containing the statement of the company’s business and legal rules of its functioning (Breyer et al., 2022).

3. Acquiring Licenses and Permits: Depending on the construction activities, the necessary licenses and permits necessary to be acquired legal to operate.

4. Opening a Business Bank Account: Setting up the business account to be utilized in managing the company’s money and being in bounds with the law.

5. Registering for Taxes: Business registration of the corporate taxes, value-added tax, and all other requirements compulsory for registering (Breyer et al., 2022).

1.4 Strategies of Winding up or Dissolution

There are three primary methods to wind up or dissolve a company:

Voluntary Dissolution:

A company may decide to close because the owners may consider that there is no future for the company anymore such as low profitability or shift of market trends.

Compulsory Dissolution:

This is done through a court order since the company maybe insolvent technically implying that it cannot pay its debts (Breyer et al., 2022).

Takeover Alternative:

If the merger does not work, A Ltd can opt for owning quite a proportion of the shares in B Ltd but not a full merger.

Alternative Strategies for Control of B Ltd PLC

If the merger between A Ltd and B Ltd fails, A Ltd can consider other methods to achieve significant control of B Ltd:

1. Acquiring Majority Shares: Complete combination of A Ltd and B Ltd cannot happen, however, A Ltd can acquire most of the shares of B Ltd through the stock exchange or privately. This would afford A Ltd strong voting rights as well as operational control over B Ltd but short of an outright purchase.

2. Strategic Partnership or Joint Venture: Another management recommendation that could be made regarding this matter is that A Ltd should form a strategic alliance or a joint venture company with B Ltd. This kind of arrangement would allow A Ltd the way into managing B Ltd and have its share of the profits without necessarily merging with B Ltd (Spieth et al., 2021).

3. Management Contract: A Ltd could enter a management contract whereby they will then manage the operations of B Ltd. This means that A Ltd can control and participate in some or most of the business strategies without necessarily owning the business (Spieth et al., 2021).

These strategies affordability for A Ltd to influence B Ltd without necessarily have to embark on a full merger and thus reduce its risks and regulatory implications.

2. Sources of Finance and Financial Strategies

2.1 Sources of Finance

Internal Funds: Business profits which have been reinvested in the business. While it reduces debts on the balance sheet it might prevent growth by being a finite source of funds.

Bank Loans: According to construction financing forms, loans are often employed in financing construction related projects. They offer intrinsic funding however with preset or fluctuating interest costs (Cole and Sokolyk, 2018).

Equity Finance: Using the rights issue to sell new shares. Yes, it does not have to be repaid but it gives out diluted equity.

Bond Issuance: Bonds are the debt securities applied in major capital requirements. Through the issuance of bonds, it means the organization can borrow huge amounts of capital at fixed rates of interest.

Government Grants and Subsidies: Present for particular construction venture for SMI associated with government plans and program, frequently involving construction or ecological concerns (Cole and Sokolyk, 2018).

2.2 Cost of Borrowing Analysis

Interest Rate Calculation: The cost of financing is the interest charge on the borrowed sum. For instance, while a 10% interest rate means that if Barclays has borrowed £250m, it will pay yearly interest worth £25m on the loan.

Debt-Service Coverage Ratio (DSCR): Amount which gives ability to meet the interest and/or principal requirements through continues operating revenue (Mohamadi and Mohamadi, 2021).

Loan-to-Value Ratio (LTV): Compares the credit risk of knowingly providing cash advance with the relative value of the loan amount to the value of assets.

Ratio Analysis

	Option 1: Equity (100%)	Option 2: Gearing (50% equity 50% borrowing)
Asset	£500m	£500m
Liabilities		(£250m)
Asset – Liabilities	£500m	£250m
Equity	£500m	£250m
Operating Profit	£100m	£100m
Interest		£25m
Net Profit	£100m	£75m
ROE	20	30



2.3 Recommended Option

Option 2 (50% Equity and 50% Borrowing) is recommended because:

1. Higher Return on Equity (ROE): With an ROE of 30%, this option yields a higher return to shareholders compared to 20% in Option 1.

2. Leverage Benefits: Borrowing at an interest rate of 10% allows the company to amplify returns without fully depleting its internal funds.

Nevertheless, the company should be willing to accept the following risks including increased in liabilities, volatility and costs of debt and debt service. If cash flows are more certain, constant and if properly managed, the leverage will improve the returns on shareholders’ funds. Consequently, borrowing £250 million should be done, while £250 million should be used in equity.

2A Analysis of Income Statement and Financial Position

To analyse ABC Limited's Income Statement and Statement of Financial Position using ratio analysis, we can calculate the following ratios to compare the performance for the years 2020 and 2021:

Ratios		2020	2021
1. Profitability Ratios	Gross Profit Margin	42.22%	41.76%
	Operating Profit Margin	14.67%	15.59%
	Net Profit Margin	9.78%	10.29%
	Return on Assets	9.23%	8.22%
2. Liquidity Ratios	Current Ratio	1.63	2.63
	Quick Ratio	1.00	1.75
3. Efficiency Ratios	Receivables Turnover	6.92	7.39
	Asset Turnover Ratio	0.94	0.80
4. Leverage Ratios	Debt-to-Equity Ratio	0.40	0.40
	Debt Ratio:	20.96%	23.47%
	Interest Coverage Ratio:	6.00	4.82

1. Profitability Ratios

Gross Profit Margin = × 100

2020 = × 100 = 42.22%

2021 = × 100 = 41.76%

Analysis: The Gross Profit Margin has slightly decreased from 42.22% to 41.76%, indicating a minor increase in the cost of sales relative to revenue in 2021.

Operating Profit Margin

Operating Profit Margin = × 100

2020 = × 100 = 14.67%

2021 = × 100 = 15.59%

Analysis: The Operating Profit Margin has improved from 14.67% to 15.59%, suggesting that the company has controlled its operating expenses better in 2021.

Net Profit Margin

Net Profit Margin = × 100

2020 = × 100 = 9.78%

2021 = × 100 = 10.29%

Analysis: The Net Profit Margin increased slightly from 9.78% to 10.29%, suggesting an improvement in overall profitability despite a drop in revenue.

Return on Assets

ROA = × 100

2020 = × 100 = 9.23%

2021 = × 100 = 8.22%

Analysis = The Return on Assets (ROA) decreased from 9.23% in 2020 to 8.22% in 2021, indicating that the company’s efficiency in generating profit from its assets declined slightly. This suggests that the company may not have been utilizing its assets as effectively in 2021 compared to the previous year.

2. Liquidity Ratios

Current Ratio =

2020 = = 1.63

2021 = = 2.63

Analysis: This also points to an enhanced liquid position given by the Current Ratio raised from 1.63 to 2.63 thus showing that the firm is well positioned to meet its short term obligations in 2021.

Quick Ratio

Quick Ratio =

2020 = = 1.00

2021 = = 1.75

Analysis: The component of the Quick Ratio has increased from 1.0 to 1.75 signifying a relative increased capacity to effectively pay short-term costs without depending on stock.

3. Efficiency Ratios

Receivables Turnover =

2020 = = 6.92

2021 = = 7.39

Analysis: The Receivables Turnover was higher in 2021 than in 2020, that is 7.39 than 6.92, which means that the company collected payments from its customers more efficiently.

Asset Turnover Ratio

Asset Turnover Ratio =

2020 = = 0.94

2021 = = 0.80

Analysis: The Asset Turnover Ratio decreased from 0.94 in 2020 to 0.80 in 2021, indicating that the company is generating less revenue per unit of assets, reflecting lower operational efficiency in utilizing its assets.

4. Leverage Ratios

Debt-to-Equity Ratio =

2020 = = 0.40

2021 = = 0.40

Analysis: Leverage measurements were stable over the two years with Debt-to-Equity Ratio equals 0.40, which means the company has not changed its leverage.

Debt Ratio:

Debt Ratio = × 100

2020 = = 20.96%

2021 = = 23.47%

Analysis: The Debt Ratio increased from 20.96% in 2020 to 23.47% in 2021, indicating that the company is using more debt to finance its assets, potentially increasing financial risk.

Interest Coverage Ratio:

Inventory Turnover Ratio =

2020 = = 6.00

2021 = = 4.82

Analysis: The Interest Coverage Ratio dropped from 6.00 in 2020 to 4.82 in 2021, suggesting the company has less ability to cover its interest payments, reflecting increased financial strain.

In all, although total revenue has dipped in 2021 the firm displayed positive changes in profitability, liquidity and efficiency ratios; suggesting an overall positive financial performance trajectory despite the decline in revenue.

3. Forms of Company Organization

3.1 Strategic and Operational Policies

Strategic Policies

Strategic policies which are management implemented in construction companies relate with the company’s long-term goals and plans. These include:

1. Market Diversification: Moving into other geographical locations or segments in construction industry to avoid risks and gain more market openings.

2. Technology Integration: Applying such application as Building Information Modelling (BIM) to increase the effectiveness of the project and decrease expenses (Wheelen et al., 2018).

3. Sustainability: Performing green building practices to fulfil legal necessities and improving company image.

Operational policies focus on managing day-to-day activities, such as:

1. Resource Allocation: Optimization of labour, material and tools which are used in the organization to reduce cost greatly.

2. Health and Safety: Adhering to code of ethics in the provision of products and services, and other protective measures that trail ahead of adverse occurrence (Kavouras et al., 2022).

3. Quality Control: Supervising projects with a view to ascertaining that they have complied with the set specifications in regard to quality.

3.2 Organisational Structures:

Different organizational structures suit different sizes of construction companies:

Small Construction Companies: Organisationally, usually, these firms employ a functional form of structure, with roles being-virtually-segmented by function, such as the finance or the marketing function.

Medium to Large Companies: To be able to cope with many projects, such companies may integrate matrixing into their structure in order to successfully manage different kinds of projects (Ganeshu et al., 2024).

Large-Scale Firms: Frequently adopt the divisional form of organizational structure whereby different division tackles distinct projects or regions.

Collaborative Working Practices

In construction companies, working practices are most effectively facilitated by means of a matrix structure. Organizationally, it allows for cross functional sharing of resources and information, within specific projects, enhancing the team players performance. This structure helps to have different specialists teamed and this will is necessary in construction projects that may involve several trades or several subcontractors. The matrix structure encourages cooperation; however, unless issues of conflict between people from the functional and project groups are effectively coordinated, there will always be disagreements (Wiener et al., 2020).

3.3 Management Leadership Styles in Construction Management

1. Autocratic Leadership: The leader makes choices on their own and is appropriate in circumstances that call for prompt, precise instructions, including on-site emergencies. It guarantees prompt completion and conformity, but if utilized excessively, it may stifle innovation and low morale among employees.

2. Democratic Leadership: Helps in facilitating working relationships and innovation because of the involvement of a group of people in the company. It is most useful where a number of professionals are needed to provide their input in attaining a certain goal and it has the added advantage of boosting staff morale (Fiaz et al., 2017).

3. Transformational Leadership: Through the use of soaring goals to higher levels, a transformational leader provides motivation, and challenges subordinates to the next level of performance. This type of leadership is effective when it comes to change, such as implementing change like improving safety measures or introducing new technology since it creates team culture and encouragement of ideas.

4. Transactional Leadership: Controls productivity and conformity since it energizes reward and non-reward penalty. It is best used in occupations that demand recognition of processes such as safety measures, and operations procedures. While it could create involvement and creativity it will not necessarily cultivate their sustained participation (Fiaz et al., 2017).

4. Resource Management Strategies

4.1 Types of Labour in Construction Companies

1. Permanent Labour: Regular employees have open-ended contracts with the business organization, therefore work fulltime. It provides certainty and can convey the standard while at times possessing information about business processes and policies (Hamza et al., 2022).

2. Contract Labour: Employees hired for a specific performance or period. This kind of labour is contractual and most often used when demand is high during some key phases of a project.

3. Subcontractors: Employers that are professional or specialized in specific activities for certain contracts like the plumbing company or the electrical company. They are used for these specific qualities and offer their insight to the project.

4. Casual Labour: Employee borrowing from the contract labourers for a day or for a week. Although the workers help in coping with fluctuating working loads, they can lack the skill level of regular employees (Hamza et al., 2022).

4.2 Techniques for Managing Labour

1. Effective Scheduling: Effectiveness ensures that enough human resource is provided to meet every project stage requirement without over staffing the project (Fewings and Henjewele, 2019). They eliminate time wastage occurrences and hence reduce on the secretary’s downtime greatly.

2. Training and Development: Continuing education for employees provides them with more and better skills and also enhances their on-the-job performance and productivity and safety consciousness.

3. Performance Monitoring: This rationale also explains how assessments of labour performance and the use of performance metrics make it possible to discover potential enhancements (Fewings and Henjewele, 2019).

4.3 Strategies to Incentivize Labour Productivity

1. Bonus or Reward: Subordinates can undergo the urge to put more effort into their work if it is reinforced by a bonus for accomplishing or surcharging targets.

2. Recognition Programs: The staff or employees may work harder when some of them have something to look forward to as in the case of ‘Employee of the Month’ (Hamza et al., 2022).

3. Opportunities for Skill Development: It may encourage and motivate the employees to perform better since it affords them an opportunity to advance in their careers and get trained.

4.4 Importance of Cost Control and Inventory Management

Source: (PowerPlay |, 2023)

Cost control is therefore, inevitable for profitability to be achieved in building projects. Competitiveness and profitability are achieved through proper cost control since there is certainty that projects are completed within the laid down cost estimates. Among the methods for reducing expenses are:

1. Budget Planning: The creation of contingency funds and the control of funds for contingent activities.

2. Variance Analysis: Identifying differences and putting into effect corrective actions using actual cost against an established budget (Tay et al., 2017).

Given that building projects frequently need for a variety of supplies and machinery, inventory management is also crucial:

1. Accurate inventory tracking: Its benefits include but are not limited to a possibility of estimating the exact quantities in stock, reducing wastage, as well as restraining overstocking.

2. Just-in-Time (JIT): Makes sure that the resources are available in a time of need so that the expenses required with storage are reduced (Tay et al., 2017).

4.5 Factors to Consider When Buying or Leasing Plant and Equipment

Source: (FasterCapital, 2024)

Whether buying or renting new machinery, there are a number of things to take into account:

1. Cost analysis: Determine the peripheral cost or gain of the acquisition of equipment as compared to leasing them. Purchasing on the other hand has a single large cost which might be lower in the long run than leasing which distributes the cost.

2. Depreciation and Maintenance: Another factor is that studying value is to be done with an understanding that depreciated is the equipment the company uses every day. Other factor relates to the cost of maintenance which should also be taken into account (Wiener et al., 2020). Leasing could turn out to be a preferable form of the company’s short-term projects to spare the company these costs.

3. Project Duration and Usage: The aspects that should be considered when deciding between the two are the periods of usage, concrete intervals of buying the apparatuses, as well as the more extended periods of work on specific projects that would possibly require purchasing the apparatuses (Suchkov and Nechaev, 2021).

Conclusion

In construction, most construction merges require efficient management of financial and engineering resources to be successful. The report stresses the importance of choosing the right organizational structure, labour management method, and funding combination. Applying initial and adequate cost control methods and efficient resource utilisation, it is possible to increase the Company’s profitability, organisational performance, and successful completion of the B Ltd acquisition.

References

Allen, W.T., Kraakman, R. and Khanna, V.S. (2021) ‘Commentaries and cases on the law of business organization.’ Aspen Publishing. Available at: https://books.google.co.in/books?hl=en&lr=&id=qqUeEAAAQBAJ&oi=fnd&pg=PT25&dq=Legal+types+of+Business+Organizations+like+sole+proprietorship+partnership&ots=ZwWuPvvwog&sig=S3wc2tE1aIOl4sR_Q-X2e-4FRvI&redir_esc=y#v=onepage&q=Legal%20types%20of%20Business%20Organizations%20like%20sole%20proprietorship%20partnership&f=false

Breyer, S.G., Stewart, R.B., Sunstein, C.R., Vermeule, A. and Herz, M. (2022) ‘Administrative Law and Regulatory Policy: Problems, Text, and Cases [Connected eBook with Study Center].’ Aspen Publishing. Available at: https://books.google.co.in/books?hl=en&lr=&id=dmNjEAAAQBAJ&oi=fnd&pg=PT30&dq=legal+process+of+establish+a+company+&ots=38MLbXZW4R&sig=ykOi_34k81g9DhsMqABLdFjpjqw&redir_esc=y#v=onepage&q=legal%20process%20of%20establish%20a%20company&f=false

Cole, R.A. and Sokolyk, T. (2018) ‘Debt financing, survival, and growth of start-up firms.’ Journal of Corporate Finance, 50, pp.609-625. Available at: https://www.sciencedirect.com/science/article/abs/pii/S0929119916302425

Corwin, L.D. and Ciampi, A.J. (2024) ‘Law Firm Partnership Agreements.’ Law Journal Press. Available at: https://books.google.co.in/books?hl=en&lr=&id=Zi6OJXw5C0QC&oi=fnd&pg=PA25&dq=LLP,+it+can+be+defined+as+a+legal+structure+that+blends+the+benefits+of+a+partnership+where+people+have+limited+liabilities,+protective+while+remaining+functional.+&ots=O98Bu5-qxJ&sig=L4blUFUKf6STP7RA5Qh3ADIQLS0&redir_esc=y#v=onepage&q&f=false

Drucker, P. (2017) ‘Concept of the Corporation.’ routledge. Available at: https://www.taylorfrancis.com/books/mono/10.4324/9781315080734/concept-corporation-peter-drucker

FasterCapital (2024). Factors To Consider Before Leasing - FasterCapital. [online] FasterCapital. Available at: https://fastercapital.com/topics/factors-to-consider-before-leasing.html [Accessed 12 Oct. 2024].

Fewings, P. and Henjewele, C. (2019) ‘Construction project management: an integrated approach.’ Routledge. Available at: https://www.sciencedirect.com/science/article/abs/pii/S0360132318306760.

Fiaz, M., Su, Q. and Saqib, A. (2017) ‘Leadership styles and employees' motivation: Perspective from an emerging economy.’ The journal of developing areas, 51(4), pp.143-156. Available at: https://muse.jhu.edu/pub/51/article/662834/summary

Ganeshu, P., Fernando, T., Therrien, M.C. and Keraminiyage, K. (2024) ‘Inter-Organisational Collaboration Structures and Features to Facilitate Stakeholder Collaboration.’ Administrative Sciences, 14(2), p.25. Available at: https://www.mdpi.com/2076-3387/14/2/25

Hamza, M., Shahid, S., Bin Hainin, M.R. and Nashwan, M.S. (2022) ‘Construction labour productivity: review of factors identified.’ International Journal of Construction Management, 22(3), pp.413-425. Available at: https://muse.jhu.edu/pub/51/article/662834/summary

Kavouras, S., Vardopoulos, I., Mitoula, R., Zorpas, A.A. and Kaldis, P. (2022) ‘Occupational health and safety scope significance in achieving sustainability.’ Sustainability, 14(4), p.2424. Available at: https://www.mdpi.com/2071-1050/14/4/2424

Means, G. (2017) ‘The modern corporation and private property.’ Routledge. Available at: https://doi.org/10.4324/9781315133188

Mohamadi, F. and Mohamadi, F. (2021) ‘Basics of Financial Modeling.’ Introduction to Project Finance in Renewable Energy Infrastructure: Including Public-Private Investments and Non-Mature Markets, pp.131-148. Available at: https://link.springer.com/chapter/10.1007/978-3-030-68740-3_11

PowerPlay |. (2023). How to Measure and Improve Labour Productivity in Construction. [online] Available at: https://www.getpowerplay.in/resources/blogs/how-to-measure-and-improve-labour-productivity-in-construction/ [Accessed 12 Oct. 2024].

?Spieth, P., Laudien, S.M. and Meissner, S. (2021) ‘Business model innovation in strategic alliances: a multi?layer perspective.’ R&D Management, 51(1), pp.24-39. Available at: https://onlinelibrary.wiley.com/doi/full/10.1111/radm.12410

Suchkov, A.I. and Nechaev, A.S. (2021) April. ‘The leasing mechanism for updating the material and technical base of construction organizations based on state regulation.’ In IOP Conference Series: Earth and Environmental Science (Vol. 751, No. 1, p. 012178). IOP Publishing. Available at: https://iopscience.iop.org/article/10.1088/1755-1315/751/1/012178/meta

Tay, Y.W.D., Panda, B., Paul, S.C., Noor Mohamed, N.A., Tan, M.J. and Leong, K.F. (2017) ‘3D printing trends in building and construction industry: a review.’ Virtual and physical prototyping, 12(3), pp.261-276. Available at: https://www.tandfonline.com/doi/abs/10.1080/17452759.2017.1326724

Wheelen, T.L., Hunger, J.D., Hoffman, A.N. and Bamford, C.E. (2018) ‘Strategic management and business policy: Globalization, innovation, and sustainability.’ pearson. Available at: https://thuvienso.hoasen.edu.vn/handle/123456789/11688

Wiener, M., Gattringer, R. and Strehl, F. (2020) ‘Participation in inter-organisational collaborative open foresight A matter of culture.’ In Corporate Foresight and Innovation Management (pp. 60-76). Routledge. Available at: https://www.taylorfrancis.com/chapters/edit/10.4324/9780429318559-6/participation-inter-organisational-collaborative-open-foresight-matter-culture-melanie-wiener-regina-gattringer-franz-strehl

Appendices

Calculation of Ratio Analysis

A Ltd PLC needs £500 million for the takeover. The company has enough internal funds, but the board is considering two options:

1. Option 1: 100% Equity Financing

2. Option 2: 50% Equity and 50% Borrowing

Financial Overview:

Option 1: 100% Equity Financing

• Assets: £500m

• Liabilities: £0

• Equity: £500m

• Operating Profit: £100m

• Interest: £0

• Net Profit: £100m

• Return on Equity (ROE): = = 20

Option 2: 50% Equity and 50% Borrowing

• Assets: £500m

• Liabilities: £250m

• Equity: £250m

• Operating Profit: £100m

• Interest: 10% of £250m=£25m

• Net Profit: Operating Profit?Interest = £100m?£25m=£75m

• Return on Equity (ROE): = = 30