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Financial management -doubts

kerstin57 (nil) (35 Points)

20 April 2012

Dear Admins,

Can u tell tell me how to solve this problem?
The net sales of A ltd. is Rs. 30cr. Earnings before interest and tax of the company as a % of net sales is 12 %. The capital employed comprises Rs.10 Cr equity, Rs.2 Cr of 13 % cumulative preference share capital and 15 % Debentures of Rs.6 Cr . Income tax rate is 40%.
Calculate the return on equity for the company and indicate it's segments due to the presence of preference share capital and 15 % Debentures .
can u pls tell me how to calculate this Segments due to the presence of preference share capital and Borrowings?

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khanna (CA FINAL ICWAI FINAL) (283 Points)
Replied 21 April 2012

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 .

ACS Parul Rawat (Entrepreneur | Corporate Law Advisor | Lawyer in Making | AIR-8) (218 Points)
Replied 10 March 2016

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.".

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Venkatesh Sharma (1 Points)
Replied 14 April 2016

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.

(Guest)

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 .

Attached File : 495266 20160415234344 book1.xlsx downloaded: 1286 times

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