Question
What will be the Return on Equity of Rahul’s company?
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.Solution
Return on equity (RoE) = Net profit/ owner’s equity Net profit = 17,92,000 (as calculated before) Owner’s equity = 50% of 1.6 crore = 80,00,000 RoE = 17,92,000/80,00,000 = 22.40%
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