Question

Net Profit after Interest but before Tax ₹ 30,000; Shareholder’s Funds ₹ 3,00,000; 10% Long-Term Debt ₹ 1,00,000. Tax Rate was 40%. Return on Investment will be ______.

Options

• 10%

• 12.5%

• 15%

• 21.25%

Answer 1

10%

Explanation:

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

Interest = 10% of 1,00,000

= ₹ 10,000

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

= 30,000 + 10,000 

= ₹ 40,000

Capital Employed = Shareholder’s Funds + Long-Term Debt

= 3,00,000 + 1,00,000

= ₹ 4,00,000

Return on Investment = `(40,000)/(4,00,000) xx 100`

= 10%

Note: It is assumed that Shareholder’s Funds include current year’s profits.