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Hence, Current Ratio (A/B) = WNI: Calculation of Current Assets Stocks Debtors(excluding provision) Bank (A) Current Liabilities Sundry Creditors (B) 1.a.2. Liquidity Ratio The liquidity ratio of the firm can be explained by Current Ratio which is computed above and Quick Ratio/ Acid Test Ratio which is as below: Quick Ratio/Acid Test Ratio =
300,000.00
Hence, Current Ratio (A/B) = WN2: Calculation of Quick Assets Debtors(excluding provision) Bank (A) Quick Liabilities Sundry Creditors (B)
300,000.00
1.a.3. Fixed Assets Ratio: There are 2 ratios that can be calculated in case of fixed assets a. Fixed assets turnover ratio: reflects relationship between fixed assets and turnover Fixed Assets Turnover ratio = Sales Net fixed assets 2.29
It is assumed that the total sales for the year is Rs. 20,00,000. b. Fixed assets to Net worth ratio: reflects relationship between fixed assets and net worth/ shareholders funds. It measures to what extent owners cash is locked in fixed assets. Fixed assets to net worth ratio = Net Fixed Assets
Net Worth Hence, fixed assets to net worth ratio is WN3: Calculation of Net worth Equity Share Capital 7% Pref Share Capital Reserves Profit and Loss account Less: Preliminary Expenses 0.95
Hence, the above ratio is WN4: Calculation of Divisible profits Profit before tax Less Tax @ 45% Profit after tax Add: Opening Balance in reserves and profit and loss a/c Profits available for distribution as dividends
Reserves and surplus of Rs. 4,00,000 are free reserves and available for distribution of dividend Preferance Dividend 100000*7% 7,000.00 Unattached Assets Pref Capital 13.25
Hence, the above ratio is Calculation of Unattached Assets Fixed assets (Net) Stocks Debtors Bank Total Unattached Assets 1.b.3.Proprietary Ratio Proprietary Ratio =
500,000.00
Preferance Share Capital Reserves Profit and Loss account (after tax profits of 2011) Less: Preliminary expenses
WN6: Calculation of Total Assets Fixed Assets (Net) Investments in Subsidiaries Stocks Debtors Bank
1.b.4. Return on Equity shareholder's funds Return on equity shareholders funds = (NPAT - Preferance Dividend)*100 Equity shareholders funds 12.48
Hence, the above ratio is WN7: Calculation of NPAT-Preferance Dividends Profit for the Year Less: Tax @ 45% Net Profit after Tax Less: Preferance Dividend NPAT -Preferance Dividends WN8: Calculation of Equity shareholders funds Net worth as per WN3 Less: Pref Share Capital Less: Profit for the Year
Ratio affecting Debentureholders: 1.c.1. Debt service ratio Debt service ratio =
Hence, the ratio is WN9: Calcualtion for Profits before interest and tax Profits before tax Add: Interest to debentureholders
It is assumed that the total sales for the year is Rs. 20,00,000. 1.c.3. Working Capital Turnover ratio Working Capital Turnover ratio
It is assumed that the total sales for the year is Rs. 20,00,000. WN 10: Calculation of Working Capital Current Assets as per WNI Less: Creditors Working Capital Q.2
The participation in the equity share capital of the company does not appear to be profitable due to following reasons: 1. The debentures of the company are due for redemption Q.3 Sales Less: Gross Profit Cost of Goods Sold Stock Turnover Ratio Cost of Goods Sold Closing Inventory 6.4 Average trade debtors*365 Net Credit Sales 24.64 2,000,000.00 400,000.00 1,600,000.00
Assumptions: 1. In the absence of information, closing inventory and debtors are considered as average inventory and debtors 2. It is assumed that entire sales of Rs. 20,00,000 is on credit basis
200000 300000
2000000 875000
875000
925000
520000 7000
ution of dividend
1325000 100000
1035000 1625000
103000*100 825000
212000 12000
(200000*6%)
2000000 875000
2000000 150000
1600000 250000
135000*365 2000000
1. Which Company is using sharholders investment more profitability Ratio NPAT -Preferance Dividend Equity shareholders funds X Ltd. 76000*100 398000 19.10
a. Return on shareholders fund Hence, the return on shareholder fund is (%) Calculation of Return to shareholders Sales Cost of Goods Sold Gross Profit Other Expenses Interest on Debenture Income Tax Net profit available for equity shareholders Calculation of shareholders fund Equity Share Capital Reserves & Surplus
220,000.00 178,000.00 398,000.00 Total Sales Owned Capital/Equityshareholders fund 1120000 398000 2.81 76000*100 1120000 6.8
Hence, the ratio is c. Net Profit Margin The net profit margin is (%) Calculation of Return to shareholders Sales Cost of Goods Sold Gross Profit Other Expenses Interest on Debenture Income Tax Net profit after Tax 1. Which Company is using sharholders investment more profitability Net Profit after Tax*100 Net Sales
Company X has a return on sharholders fund of 19.10% and net profit margin of 6.8% which is higher than the corresponding figures for Company Y which is 17.33% and 4.8%. Although the Owned capital turnover ratio of Company X is lower than that of Company Y, Company X has been giving higher returns as compared to Company Y on shareholders funds.Thus Company X is using shareholders investments more profitably. 2. Which company is better able to meet its current obligations a.Liquid Ratio Hence, the ratio is Calculation of Liquid Assets Cash Liquid Assets Current liabilities 108000 181000 0.60
42,000.00
Debtors
66,000.00 108,000.00 Creditors Super liquid assets (Cash Balance) Current Liabilities 181,000.00 42000 181000 0.23 354000 181000 1.96
Calculation of Current Liabilities b. Super liquid ratio Hence, the ratio is c. Current Ratio Hence, the current ratio is Calculation of Current Assets Cash Debtors Stock
2. Which Company is better meeting it's current obligations? Company Y has higher current ratio (2.05), liquid ratio (1.14) and the super liquid ratio (0.3) which is higher than that of Company X. Company X has current ratio of 1.96, liquid ratio of 0.60 and super liquid ratio of 0.23. Hence, Company Y has better ability to meet it's current obligations as compared to Company X. 3. Which company is collecting it's receivables faster? a. Accounts Collection Period Hence, the accounts collection period Debtors*No. of Days in a year Sales 114000*365 1120000 37.15
Since, Compay X has average collection period of 37 days (approx) which is higher than average collection period of Company Y of 44 days (approx), hence company X is collecting it's receivables faster. 4. Which company is earning a higher rate of return on its total investments? a. Return on Total Investments Hence, the ratio is Calculation of net profit before interest Sales Cost of Goods Sold Gross Profit Other Expenses Net Profit Before Interest Calculation of Total Investments Cash Debtors Stock Plant (Net) Net Profit before Interest Total Investments 160000 693000 0.23
Since, Company X has return on total assets ratio of 23% (approx) which is higher than the return on assets of Company Y which is 20% (approx), hence Company X is earning a higher rate of return on its total investments.
Since, Company X has return on total assets ratio of 23% (approx) which is higher than the return on assets of Company Y which is 20% (approx), hence Company X is earning a higher rate of return on its total investments. 5.If you were to buy the debentures of one of these two companies, which one would you choose? a. Interest Coverage ratio Hence, the coverage ratio is Calculation of net profit before interest Sales Cost of Goods Sold Gross Profit Other Expenses Net Profit Before Interest Net Profit before interest Debenture Interest 160000 8000 20
The debenture Interest coverage ability of Company X is 20 times which is higher than the debenture interest coverage ability ratio of Company Y which is 14 times. Hence, Company X has better ability to cover debenture interest. Hence, debentures of Company X should be purchased based on interest coverage ability.
350,000.00 100,000.00 450,000.00 1640000 450000 3.64 78000*100 1640000 4.8 Refer calculation as (a) above
of 6.8% which is higher than the Owned capital turnover ratio of er returns as compared to estments more profitably.
64,000.00
uid ratio (0.3) which is higher than d super liquid ratio of 0.23. Hence, ompany X.
would you
168000 12000 14
her than the debenture interest better ability to cover debenture rest coverage ability.