(i) Debt to equity ratio |
(ii) Working capital turnover ratio |
(iii) Return on investment |
Answer:
(i) Debt to Equity Ratio \[=\frac{\text{Debt*}}{\text{Equity}\,\text{or}\,\text{Shareholders }\!\!'\!\!\text{ }\,\text{Funds**}}=\frac{10,000}{35,000}=0.286\,:\,1\] *Debts = 12% Debentures = Rs. 10,000 **Shareholders' Funds = Equity Share Capital + General Reserve + Balance of Statement of Profit and Loss = 25,000 + 2,500 + 7,500 = Rs. 35,000 (ii) Working Capital Turnover Ratio \[=\frac{\text{Revenue}\,\text{from}\,\text{Operations}\,\text{(Net}\,\text{Sales)}}{\text{Working}\,\text{Capital*}}=\frac{25,000}{2,500}=10\,times\] *Working Capital = Current Assets** - Current Liabilities = 10,000 - 7,500=Rs. 2,500 **Current Assets = Cash + Debtors = 2,750 + 7250 = Rs. 10,000 Current Liabilities = Creditors = Rs. 7,500 (iii) Return on Investment \[=\frac{\text{Profit}\,\text{before}\,\text{Interest,}\,\text{Tax}\,\text{and}\,\text{Proference}\,\text{Dividend*}}{\text{Capital}\,\text{Employed**}}\times 100\] \[=\frac{15,900}{45,000}\times 100=35.33%\] *Profit before Tax \[=\frac{\text{Profit}\,\text{after}\,\text{Tax}}{100-\text{Tax}\,\text{Rate}}\times 100=\frac{7,500\times 100}{100-50}=Rs.\,15,000\] Profit before Interest and Tax = 15,000 + 900 (interest on debentures) = Rs. 15,900 **Capital Employed = Equity Share Capital + General Reserve + Balance of Statement of Profit and Loss Account + 9% Debentures = 25,000 + 2,500 + 7,500 + 10,000 = Rs. 45,000 Value reflected by the company is: Safety By maintaining a low debt to equity ratio, the company provides sufficient safety margin and protection to the creditors.
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