Read the following information and answer the question.
Trade Receivables Turnover Ratio = 4 times
Gross Profit Ratio = 20%
Gross Profit for the year was ₹5,00,000
Bills Receivables = ₹60,000
Net Profit (after) Tax Ratio 12%
Tax Rate is 50%
10% Long-term Borrowings = ₹12,00,000
Shareholders' Funds are ₹ 4,00,000
Non-current Liabilities are ₹18,00,000
Sale of goods on credit only.
What will be the return on investment?
Answer & explanation
Correct answer: option 3
The correct answer is option 3- 32.72%.
1) Capital Employed = Shareholders’ Funds + non-current liabilities
= 4,00,000 + 18,00,000
= ₹22,00,000
* Long-term borrowings are included already in non-current liabilities.
2) Net Profit Ratio = Net profit/Revenue from Operations × 100
12 = (Net profit/ 25,00,000)X 100
Net profit = (25,00,000 x 12)/100
= ₹3,00,000
Tax rate is 50% means profit before tax = 3,00,000 + 3,00,000
= ₹6,00,000
10% Long-term Borrowings = ₹12,00,000
Interest = 12,00,000 X 10/100
= ₹1,20,000
So, net profit before interest and tax = 6,00,000 + 1,20,000
= ₹7,20,000
Return on Investment = Profit before Interest and Tax/ Capital Employed × 100
= 7,20,000/22,00,000 X 100
= 32.72%