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Question
From the following information, calculate any two of the following ratios:
(a) Debt-Equity Ratio
(b) Working Capital Turnover Ratio and
(c) Return on Investment
Information: Equity Share capital Rs 10,00,000, General Reserve Rs 1,00,000; Profit and Loss Account after tax and interest Rs 3,00,000; 12% Debenture Rs 4,00,000; Creditors Rs 3,00,000; Land and Building Rs 13,00,000; Furniture Rs 3,00,000; Debtors Rs 2,00,00 and Cash Rs 1,10,000 and Preliminary expenses Rs 1,00,000
Sales for the year ended 31-3-2011 was Rs 30,00,000. Tax Paid 50%.
Solution
(a) Debt Equity Ratio =`"Debt/Equity"`
Debt = 12% Debentures
= Rs 4,00,000
Equity = Equity Share Capital + General Reserve + Profit and Loss − Prepaid Expenses
= 10,00,000 + 1,00,000 + 3,00,000 − 1,00,000
= Rs 13,00,000
∴ Debt Equity Ratio=`(4,00,000)/(13,00,000)=0.31:1`
(b)Working Capital Turnover Ratio = `"Net Sales"/"Working Capital"`
Net sales = Rs 30,00,000
Working Capital = Current Assets − Current Liabilities
Current Assets = Debtors + Cash
= 2,90,000 + 1,10,000 = 4,00,000
Current Liabilities = Creditors
= 3,00,000
∴ Working Capital = 4,00,000 − 3,00,000
= Rs 1,00,000
∴ Working Capital Turnover Ratio =`(3,00,000)/(1,00,000)=30"times"`
(c) Return on Investment= `"Profit before Interest and Tax" /"Capital Employee"xx100`
Profit before interest and tax = Profit after tax + tax + Interest
= 3,00,000 + 3,00,000 + 48,000
= Rs 6,48,000
Capital Employed = Debt + Equity
= 4,00,000 + 13,00,000
= Rs 17,00,000
Return of Investment =`(6,48,000)/(17,00,000)xx100=38.12%`
Notes
Calculation of Tax
Let tax be 50% of Profit before Tax.
Let Profit before tax be x%.
Profit before tax = Profit after the tax + tax
x=`3,00,0000+(50x)/100`
`(x-50)/100 x=3,00,000`
`x=6,00,000`
Profit before Interest and Tax = Profit before tax + Interest
= 6,00,000 + 48,000
= Rs 6,48,000
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