Question

Calculate ‘Return on Investment’ and ‘Debt to Equity Ratio’ from the following information:

Net Profit after Interest and Tax	₹ 6,00,000
6% Debentures	₹ 10,00,000
Tax Rate	40%
Capital Employed	₹ 20,00,000

Answer 1

(i) Calculation of Net Profit before Interest and Tax:

Net Profit after Tax = ₹ 6,00,000

Net Profit before Tax = `₹ 6,00,000 xx 100/60`

= ₹ 10,00,000

Debentures = ₹ 10,00,000 at 6% interest

Interest = ₹ 10,00,000 × `6/100`

= ₹ 60,000

Net Profit before Interest and Tax = Net Profit before Tax + Interest

= ₹ 10,00,000 + ₹ 60,000

= ₹ 10,60,000

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

= `(₹ 10,60,000)/(₹ 20,00,000) xx 100`

= 53%

(ii) Long-term Debts = 6% Debentures = ₹ 10,00,000

Shareholder’s Funds = Capital Employed − Long-term Debts

= ₹ 20,00,000 − ₹ 10,00,000

= ₹ 10,00,000

Debt Equity Ratio = `"Long term Debts"/"Shareholder’s Funds"`

= `(₹ 10,00,000)/(₹ 10,00,000)`

= 1 : 1