17.CHAPTER 4: PROFITABILITY RATIOS (ROI) ASSIGNMENT # 10 WITH ANSWERS

LEARNING OUTCOMES:


INTRODUCTION

THE PROFITABILITY RATIO:

 RETURN ON CAPITAL EMPLOYED (ROI)

                        OR

 RETURN ON CAPITAL EMPLOYED (ROE)

INTRODUCTION

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TASK 

ASSIGNMENT # 10

Ques 1

Y ltd's profit after interest and tax was 100000.

Its current assets were 400000. Current liabilities 200000, fixed asset 600000 and

10% long term debt 400000.

The rate of tax was 20%. Calculate return on investment of Y limited.

Ans. 20.6 2%

Ques 2

With the help of the following information,

 Calculate Return on Investment:
Net profit after  Interest and Tax 600000,

10% Debentures 1000000, Tax @ 40%, Capital employed 8000000.

Ans. 13.45%

Ques 3.

State with reasons, whether the following transactions will increase, decrease or not change the Return on Investment 

1.Purchase of machinery worth 200000 by issue of equity shares. 

2. C depreciation of 5,000 on machinery. 

3. Redemption of debentures in cash 70,000. 

4. Converting 50,000, 9% Debentures into Equity shares. 

ANSWERS TO ASSIGNMENT # 10

QUES. 1

Net profit before tax = Net profit after tax/ 100 - tax rate x 100 
= 100000/ 100- 20 x 100 
= 125000
Therefore Net profit before interest and tax = Net profit before tax + Interest on long term debt
= 125000 + 10% of 4 lakh
 = 125000 + 40000
= 165000
Capital employed = Fixed assets + Working capital (current assets minus current liabilities)
=6 lakh + (4 lakh - 2 lakh) = 8 lakh
Therefore Return on Investment = 
Net profit before interest and tax/ Capital Employed x 100 

= 165000 /800000 x 100
 = 20.62%

QUES. 2

Return on Investment = Net profit before interest and tax /Capital employed x 100 

Net profit before tax =Net profit after tax/ 100 - tax rate x 100 

= 600000/ 100 - 40 x 100 =10 lakh 

Therefore, Net profit before interest and tax = Net profit before tax + Interest on long term debt 
= 10 lakh + 10% of ten lakh
= 10 lakh + one lakh = 11 lakh
Capital employed = 80 lacs 

Therefore, Return on investment =11 lakh /80 lakh x 100 
= 13.45%

QUES. 3

Return on investment=  Net profit before interest and tax /capital employed x 100

1. Purchase of machinery worth 200000 by issue of equity shares. 
Effect: decrease the ratio. 
Reason: no change in net profit before interest and tax but there is increase in capital employed since shareholders funds increases. 

2. Charging depreciation of  Rs 5000 on machinery. 
Effect: decrease in the ratio. 
Reason: Decrease in both net profit before interest and tax and in capital employed (since net fixed assets will decrease) .Assuming that ROI< 100%, decrease in both. Net profit before interest and tax and ine capital employed by the same amount will result in decrease in ROI.

3. Redemption of debentures in cash Rs. 70000. 
Effect: increase in the ratio. 
Reason: no change in net profit before interest and tax but decrease in capital employed. 

4. Converting Rs 50000, 9% debentures into equity shares. 
Effect: no change in the ratio. 
Reason no change in net profit before interest and tax and capital employed.