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RATIOS ANALYSIS

Question 1: X Co. has made plans for the next year. It is estimated that the company will employ total assets of Rs. 8,00,000. 50 per cent of the assets being financed by borrowed capital at an interest cost of 8 per cent per year. The direct costs for the year are estimated at Rs. 4,80,000 and all other operating expenses are estimated at Rs. 80,000. The goods will be sold to customers at 150 per cent of the direct costs. Tax rate is assumed to be 50 per cent. Calculate: a. Net Profit Margin/NP Ratio b. ROA c. Assets turnover ratio d. Return on owner’s equity [Hint – Return on shareholder’s funds] Q2 The total sales (all credit) of a firm are Rs. 6,40,000. It has a gross profit margin of 15 per cent and a current ratio of 2.5. The firm’s current liabilities are Rs. 96,000, Inventories as Rs. 48,000 and cash as Rs. 16,000. a. Determine the average inventory to be carried by the firm, if an inventory turnover of 5 times is expected. b. Determine the average collection period if the opening balance of debtors is

intended to be Rs. 80,000. [In both the above cases, assume a year to have 360 days] Question 1: X Co. has made plans for the next year. It is estimated that the company will employ total assets of Rs. 8,00,000. 50 per cent of the assets being financed by borrowed capital at an interest cost of 8 per cent per year. The direct costs for the year are estimated at Rs. 4,80,000 and all other operating expenses are estimated at Rs. 80,000. The goods will be sold to customers at 150 per cent of the direct costs. Tax rate is assumed to be 50 per cent. Calculate: a. Net Profit Margin/NP Ratio b. ROA c. Assets turnover ratio d. Return on owner’s equity [Hint – Return on shareholder’s funds] Question 3: The following figures relate to the trading activities of Hind traders limited for the year ended June 30 th 06. Sales 1,500,000 Purchases 966,750 Opening Stock 228,750 Closing Stock 295,500 Sales Returns 60,000 Selling & Distribution Expenses:Salaries 45,900 Advertising 14,100 Traveling 6,000

Non-operating expenses:Loss on sale of assets 12,000 Administrative expenses:Salaries 81,000 Rent 8,100 Stationary 7,500 Depreciation 27,900 Other Charges 49,500 Provision for taxation 120,000 Non-Operating Income:Dividend on shares 27,000 Profit on sale of shares 9,000 You are required to: a. Rearrange the above figures in a form suitable for analysis. [i.e. an Income Statement] b. Show separately the following ratios: (1) GP Ratio (2) Operating Profit Ratio (3) Stock turnover ratio To Question 1: a. 8.9% b. 10% c. 0.9 times d. 16% Q2 a. Rs. 1,08,800 b. 72 days To Question 3: a. Particulars Gross Amount Net Amount Sales (Less: Returns) 1,440,000 Less: Cost of Sales: Opening Stock 228, 750

(+) Purchases 966,750 1,195,500 (-) Closing Stock 295,500 (-) 900,000 GROSS PROFIT 540,000 (-) Non-operating Expenses 12,000 (-) Selling & Dist. Exp. 66,000 (Sal.+ Advertising +Traveling) (-) Administrative Exp. 174,000 (-) 252,000 (+) Non-Operating Profit 36,000 (+) 36,000 (Dividend on shares +Profit on sale) EBIT/PBT 324,000 (-) Provision for taxation (-) 120,000 PAT/NET PROFIT 204,000 b. 5.Premier Company's net profit margin is 8 percent, total assets turnover ratio is 2.5 times, debt to total assets ratio is 0.6. What is the return on equity for Premier? Solution: Net profit Return on equity = Equity = Net profit Net sales Total assets xx Net sales Total assets Equity 1 = 0.08 x 2.5 x = 0.5 or 50 per cent 0.4 Debt Equity Note : = 0.6 So = 1- 0.6 = 0.4 Total assets Total assets

Hence Total assets/Equity = 1/0.4 6.The following information is given for Alpha Corporation Sales3500 Current ratio1.5 Acid test ratio1.2 Current liabilities1000 What is the inventory turnover ratio? Solution: Current assets = Current liabilities x 1.5 = 1000 x 1.5 = 1500 Quick assets= Current liabilities x 1.2 = 1000 x 1.2 = 1200 Inventories= 300 3500 Inventory turnover ratio == 11.7 300 (1) 37.5 % (2) 22.5 % (3) 3.43 times