Question

A Company has a loan of ₹ 30,00,000 as part of its capital employed. Interest payable on the loan is 12% and the R.O.I. of the company is 25%. The rate of income tax is 40%. What is the gain to shareholders due to the loan raised by the company?

Answer 1

Since Capital Employed given in the question is ₹ 30,00,000 and R.O.I. is 25%, therefore:

Return on Investment = `"Net Profit before Interest and Tax"/"Capital Employed" xx 100`

25 = `"Net Profit before Interest and Tax"/(₹ 30,00,000) xx 100`

Net Profit before Interest and Tax = `25/100 xx ₹ 30,00,000`

= ₹ 7,50,000

Less Interest on loan = `12/100 xx ₹ 30,00,000`

= ₹ 3,60,000

Profit after Interest =  ₹ 7,50,000 − ₹ 3,60,000

= ₹ 3,90,000

Less Tax = `40/100 xx ₹ 3,90,000`

= ₹ 1,56,000

Net gain to shareholders = ₹ 3,90,000 − ₹ 1,56,000

= ₹ 2,34,000