Question 166:
Net Profit after interest but before tax ` 1,40,000; 15% Long-term Debts 4,00,000; Shareholders' Funds `2,40,000; Tax Rate 50%. Calculate Return on Capital Employed.
Answer:
Return on Capital Employed = Profit Before interest, tax and dividend/ Capital Employed×100
Return on Capital Employed = 2,00,000/6,40,000×100=31.25%
Working Note:
Interest =4,00,000×15/100=60,000
Profit Before interest= Profit after interest + Interest
Profit Before interest=1,40,000+60,000=2,00,000
Capital Employed= Long-term Debts + Shareholders' Funds
Capital Employed= 4,00,000+2,40,000=6,40,000
Question 167:
Y Ltd.'s profit after interest and tax was ` 1,00,000. Its Current Assets were ` 4,00,000; Current Liabilities ` 2,00,000; Fixed Assets ` 6,00,000 and 10% Long-term Debt ` 4,00,000. The rate of tax was 20%. Calculate 'Return on Investment' of Y Ltd.
Answer:
Return on Investment = (Net Profit before Interest,
Tax and Dividend/ Capital Employed × 100)
Let Profit before tax be
` 100
Tax = ` 20
Profit after tax = `
(100 – 20) = `
80
If Profit after tax is `
80 then profit before tax is =
` 100
If Profit after tax is `
1,00,000 then profit before tax is =
` (1,00,000 × 100/80) =
` 1,25,000
Interest on long-term borrowings =
` (4,00,000 × 10/100)=
` 40,000
Profit after interest and Tax =
` (1,25,000 + 40,000) =
` 1,65,000
Capital Employed = Fixed Assets+ Current Assets – Current Liabilities
= ` (6,00,000 +
4,00,000 – 2,00,000) = `
8,00,000
Return on Investment = (1,65,000/8,00,000 × 100 )= 20.625% or 20.63%
(approx.)
Question 168:
Calculate Return on Investment (ROI) from the following details: Net Profit after Tax ` 6,50,000; Rate of Income Tax 50%; 10% Debentures of ` 100 each ` 10,00,000; Fixed Assets at cost ` 22,50,000; Accumulated Depreciation on Fixed Assets up to date ` 2,50,000; Current Assets ` 12,00,000; Current Liabilities ` 4,00,000.
Answer:
Net Fixed Assets = Fixed Assets (at cost) − Accumulated Depreciation
= 22,50,000 − 2,50,000 = 20,00,000
Capital Employed = Net Fixed Assets + Current Assets − Current Liabilities
= 20,00,000 + 12,00,000 − 4,00,000
= 28,00,000
Interest on 10% Debentures = 10% of 10,00,000 = 1,00,000
Let Profit before Tax be = x
Profit after Tax = Profit Before Tax − Tax
Tax Rate = 50%
∴ Tax = 0.5 x
x − 0.5 x = 6,50,000
x = 13,00,000
Net Profit before Tax = x = 13,00,000
Profit before Interest and Tax = Profit before Tax + Interest on Long-term Debt
= 13,00,000 + 1,00,000
= 14,00,000
Return on Investment = Net profit Before Interest and Tax ×100/ Capital Employed
Return on Investment = 14,00,000 ×100 / 28,00,000=50%
Question 169:
From the following information, calculate Return on Investment (or Return on Capital Employed):
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Particulars |
` |
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Share Capital |
5,00,000 |
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Reserves and Surplus |
2,50,000 |
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Net Fixed Assets |
22,50,000 |
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Non-current Trade Investments |
2,50,000 |
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Current Assets |
11,00,000 |
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10% Long-term Borrowings |
20,00,000 |
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Current Liabilities |
8,50,000 |
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Long-term Provision |
NIL |
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Answer:
Net Profit before tax = 6,00,000
Net Profit before interest, tax and dividend = Net Profit before tax + Interest
on long-term borrowings
= 6,00,000 + 10% of 20,00,000 = 6,00,000 + 2,00,000 = 8,00,000
Capital Employed = Share Capital + Reserves and Surplus + Long-term borrowings
=
5,00,000 + 2,50,000 + 20,00,000 = 27,50,000
Return on Investment = Net profit
Before Interest, Tax and Dividend ×100/ Capital Employed
=8,00,000×100/27,50,0000
=29.09%
Question 170:
State with reason whether the following transactions will increase, decrease
or not change the 'Return on Investment' Ratio:
(i) Purchase of machinery worth
`10,00,000 by issue of equity shares.
(ii) Charging depreciation of
`25,000 on machinery.
(iii) Redemption of debentures by cheque
`2,00,000.
(iv) Conversion of 9% Debentures of
`1,00,000 into equity shares.
Answer:
|
Transaction |
Impact |
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Purchase of machinery worth ` 10,00,000 by issue of equity shares. |
Issue of shares will lead to an increase in the capital employed by ` 10,00,000.But profit remains intact and so there will be a decline in the return on investment ratio. |
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Charging depreciation of ` 25,000 on machinery. |
Simultaneous decrease in profits and capital employed by ` 25,000 will lead to a decline in return on investment ratio. |
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Redemption of debentures by cheque ` 2,00,000. |
Redemption of debentures will lead to a decrease in the capital employed by ` 2,00,000. But profit remains intact and so there will be an increase in the return on investment ratio. |
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Conversion of 9% Debentures of ` 1,00,000 into equity shares. |
Decrease in debentures and increase in share capital causing a simultaneous increase and decrease in capital employed will leave the return on investment ratio unchanged. |