Section A

ServicePro recently executed a 1-for-3 rights issue at a price below the current market value. The proceeds were used entirely to pay down a long-term bank loan. Assuming profits remain unchanged, what is the most likely immediate effect on ServicePro's Return on Capital Employed (ROCE) and Gearing ratio?

A rights issue increases Equity. Using the proceeds to pay down a loan decreases Debt by the exact same amount. Therefore, total Capital Employed (Equity + Debt) remains unchanged. If operating profit (PBIT) is unchanged, ROCE (PBIT / Capital Employed) remains unchanged. Gearing (Debt / Equity) will decrease significantly because Debt (numerator) is lower and Equity (denominator) is higher.