Unit 5- Finance

• What is forward guidance in relation to interest rates?

  Insight into future interest rate trends
• What is the current interest rate mentioned?

  4.5%
• What are the implications of falling interest rates for consumers?

  • More borrowing
  • Higher mortgage income
• What are the implications of falling interest rates for businesses?

  • Decreases costs
  • Increases profits
  • Benefits highly geared businesses
  • Increase in sales, especially for luxuries
• What does the profitability ratio measure?

  Profit earned relative to business size
• What are the two types of profit mentioned?

  Absolute profit and relative profit
• How is gross profit calculated?

  Revenue - cost of sales
• What does operating profit indicate?

  Efficiency in covering variable costs
• What are the steps to calculate gross profit margin?

  1. Gross Profit × 100
  2. Divide by sales
  3. Aim to increase by:

  • Increasing selling price
  • Reducing variable costs
• What is the formula for operating profit margin?

  Operating profit × 100 / sales
• What are the ways to increase operating profit margin?

  • Reduce variable costs
  • Increase selling price
  • Reduce fixed costs
• What does a higher operating profit margin indicate?

  Better efficiency in covering costs
• What is the formula for return on capital employed?

  Operating profit × 100 / capital employed
• What does return on capital employed measure?

  • Efficiency in generating profit
  • Based on long-term funds invested
• What is considered better for return on capital employed?

  A high return on capital employed