Question

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 1

Transaction	Impact
Purchase of machinery worth Rs 10,00,000 by issue of equity shares.	Issue of shares will lead to an increase in the capital employed by Rs 10,00,000.But profit remains intact and so there will be a decline in the return on investment ratio.
Charging depreciation of Rs 25,000 on machinery.	Simultaneous decrease in profits and capital employed by Rs 25,000 will lead to a decline in return on investment ratio.
Redemption of debentures by cheque Rs 2,00,000.	Redemption of debentures will lead to a decrease in the capital employed by Rs 2,00,000. Butprofit remains intact and so there will be an increase in the return on investment ratio.
Conversion of 9% Debentures of Rs 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.