Case study

Rajat was deciding to start his own business. He was busy creating a detailed, well written and pleasing formatted plan to present it to the stakeholder. His aim was to satisfy the concerns, queries and issues of each group. While preparing the business plan he focussed on the following points.

A. The manufacturing operation that he will follow

B. Established the exact route of each individual item, part of assembly

C. He decided the form of business organisation that he needs to set up. This was done so that the investors know who controls the organisation

D. He also designed the amount of finance required and created the break-even analysis

E. He drafted the number and type of people required and what will be the selection process

F. He carefully analysed and did SWOT analysis for the business

Once the plan was drafted Rajat presented it before the team of DM capital. DM capital agreed to invest ₹20 cr for 10% share in the company. Rajat invested ₹10 cr out of his saving and also borrowed ₹20 cr from a bank @10% interest. Rajat started business and at the end of the first year earned a profit of ₹30 cr after paying taxes.

Calculate the ROE for the first financial year of the company created by Rajat.

100%

The correct answer is option (2) - 100%

Equity of Rajat= Rs 10 Cr

Equity of DM capital= Rs 20 Cr

Total equity = Rs 30 Cr

Profit after taxes = Rs 30 Cr

ROE= (Net Income /Equity)*100

      = (30/30)*100

      =100%