From the following information, calculate 'Return on Equity':$\text{Captital}\text{ }\text{ }\text{ }\text{ }\text{ }\text{ }\text{ }\text{ }{\text{₹}}\text{ }\text{6,00,000}\\10{\text{%}}{\text{Loan}}\text{ }\text{ }\text{ }\text{ }\text{ }\text{ }\text{ }{\text{₹}}\text{ }20,000$
Net profit before interest ₹ 1,40,000. Also, state what is this return on rupees per lakh of equity.
✓
Answer
$\text{Return On Equity}=\frac{\text{Net Profit after Tax}}{\text{Equity}}\times100$$\text{Interest}=2,00,000\times {\frac{10}{100}}= \text{Rs.}20,000$
$\text{Profit after interest = 1,40,000 - 20,000= 1, 20, 000}$
$\text{ROE} \text{ }\text{ }=\frac{1,20,000}{6,00,000}\times100= {\text{20%}}$
$\text{Return on rupees per lakh = 1,00,000 x 0.2 = Rs.20,000}$
Alternate Answer
$\text{Return On Equity}=\frac{\text{Net Profit after Tax}}{\text{Equity}}\times100$
$\text{Interest}=2,00,000\times{\frac{10}{100}}=\text{Rs.}20, 000$
$\text{Profit after interest}=1,40,000-20,000= 1,20,000$
$\text{ROE}=\frac{1,20,000}{4,00,000}\times100=30\text{%}$
$\text{Working note: Equity}=\text{Total capital - loan}$
$=6,00,000 - 2,00,000$
$= 4,00,000/-$
$\text{Return on rupees per lakh}=1,00,000\text{ } \times\text{ }0.3 =\text{Rs.}30,000$
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