Financial management -doubts

Given that 

sales  = rs. 30cr

EBIT = sales * 12%   ==>  30cr *12% = 36000000.

The given capital employed is as follows :

Equity = 10 cr

18% preference share = 2 cr.

15%Debenture = 6cr

Income tax rate = 40%

and for calculation of RETURN ON EQUITY the formula is EBIT (1-tax rate )/ CAPITAL EMPLOYED

here capital employed is the total of equity + 18%preference share + 15%debenture = 180000000

hence 36000000(1-0.4)/180000000 =0.12 which is in 12%

and for calculating financial leverage the formula is          

EBIT /(EBT-(PREFERENCEDIVIDEND/1-TAXRATE))

IF YOU R NOT SATISFY  WITH THE ABOVE ANSWER PLEASE CORRECT ME .

Mr. Khanna

I m having a doubt in the same qus. and the same solution is given in many books but as per my understanding profit on Equity is calculated on EAT after Pref. Dividend .i.e  Earning available for Equity shareholders and not on EBIT.

And kindly explian meaning of  "indicate it's segments due to the presence of preference share capital and 15 % Debentures.".

 

Dear admins, 

Please explain the meaning of "indicate its segment in ROE due to presence of preference share capital and 15% debenture" in the same question above.

Segments due to presence of pref share capital and debts means -Impact of financial leverage on shareholder wealth  by using ROI  and ROE anaytical framework 

The impact of FL on ROE is positive if ROI (IRR)after tax is greater than Cost of funds bearing fixed financial payments like debts ,pref share capital. and is negative if ROI (after tax )is less than funds bearning fixed payamets.

I have solved this question.Please find the attached file .