question_answer

From the following information, calculate any two of the following ratios:

(i) Debt to equity ratio

(ii) Working capital turnover ratio

(iii) Return on investment

Information Equity share capital Rs. 25,000, general reserve Rs. 2,500, balance of statement of profit and loss after interest and tax Rs. 7,500, 9% debentures Rs. 10,000, creditors Rs. 7,500, land and building Rs. 32,500, equipments Rs. 7,500, debtors Rs. 7,250, cash Rs. 2,750, revenue from operations i.e. sales for the year ended 31st March, 2017 was Rs. 25,000, tax rate is 50%. Identify the value reflected by the company in maintaining debt to equity ratio.

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.