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Question

Refer to the following information to answer the next 4 questions (Q11 to Q14) Rahul is looking to expand his company and prepares the financial plan. The company is estimated to have total assets worth Rs.1.6 crore. The total assets will be funded by a mix of owned and borrowed capital in 1:1 ratio. The interest cost on borrowed capital is 8% per annum. The direct and other operating costs for next year are estimated to be Rs.96 lakh and Rs.16 lakh respectively. The sales price of the product is 150% of direct costs. The company pays 30% tax.

Calculate the net profit margin based on above information?

A 15.56% Correct Answer Incorrect Answer
B 17.78% Correct Answer Incorrect Answer
C 12.44% Correct Answer Incorrect Answer
D 11.20% Correct Answer Incorrect Answer
E 14.0% Correct Answer Incorrect Answer

Solution

Net profit Margin = Net Profit/ Sales Sales = 150% of direct costs = 150% of 96 lakh = 1,44,00,000   Calculation of Net profit: Sales                                                               1,44,00,000 Less: Direct costs                                           -96,00,000 Less: operating costs                                      -16,00,000 EBIT                                                               32,00,000 Less: Interest on debt (8% on 80 lakh)           -6,40,000 Profit Before tax                                           25,60,000 Less: Tax (30%)                                              -7,68,000 Net Profit                                                       17,92,000   Net profit Margin = 1792000/14400000                             = 12.44%

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