Question

From the following information, calculate any two of the following ratios:

(a) Debt-Equity Ratio

(b) Working Capital Turnover Ration and

(c) Return on Investment

 

Information: Equity Share capital Rs 50,000, General Reserve Rs 5,000; Profit and Loss

Account after tax and interest Rs 15,000; 9% Debenture Rs 20,000; Creditors Rs 15,000; Land and Building Rs 65,000; Equipments Rs 15,000; Debtors Rs 14,500 and Cash Rs 5,500. Discount on issue of shares Rs 5,000

 

Sales for the year ended 31-3-2011 was Rs 1,50,000. Tax rate 50%.

Answer 1

(a) Debt = 9% Debenture = Rs 20,000

Equity	=	Equity share capital + General Reserve + Profit after Interest and Tax − Discount on issue of Shares
	=	50,000 + 5,000 + 15,000 − 5,000
	=	Rs 65,000

∴ Debt-Equity Ratio =` "(Debt)"/"(Equity)"=(20,000)/(65,000)=0.31:1` 

Working Capital Turnover Ratio=`"Sales"/"Working Capital" xx100` 

Sales =Rs 1,50,000

Working Capital = Current Assets − Current Liabilities

Current Assets = Debtors + Cash

= 14,500 + 5,500

= Rs 20,000

Current Liabilities = Creditors − 15,000

∴ Working Capital = 20,000 − 15,000

= Rs 5,000 

Working Capital Turnover Ratio =` (1,50,000)/(5,000)=30  "times"` 

c) Return on Investment

`"Return on Investment"="Profit before Interest and Tax"/"Capital Employed"` 

Profit before Interest and Tax = Profit after tax and interest + tax + interest

= 15,000 + 15,000 + 1,800

= Rs 31,800

Capital employed = Debt + Equity

= 20,000 + 65,000 = Rs 85,000 

∴ Return on Investment = `(31,800)/(85,000)xx100=37.41%` 

Working Note: Calculate of Tax

Let Tax be 50% of profit before tax

Let profit before tax be x%

Profit before tax = Profit after tax + Tax 

=`15,000+(50x)/100=15,000`  

Or`,x - (50x)/100=15,000` 

x=Rs 30,000 

`"Profit before Interest Tax" ="Profit Before Tax"+"Interest" ` 

                                            =`30,000+1,800`

                                             =Rs `31,800`