Abc co. Has sales of rs 500,000, operating profit of rs 50,000, interest expense of rs 10,000, tax expense of rs 20,000, total equity of rs 125,000 and total debt of rs 275,000. Their return on equity is:
Answers
Operating profit = 50,000
Interest expense = 10,000
Tax expense = 20,000
Total equity = 125,000
Total debt = 275,000
Operating profit = EBIT( Earnings before interest and tax)
EBIT = 50000
(-)
Interest = (10000)
______________
EBT = 40000
(Earnings before tax)
(-)
Tax = (20000)
___________
EAT = 20000
(Earnings after tax)
___________
since there is no preference dividend EAT is equal to Earnings available to Equity holders
Return on Equity
= Earnings available/ Total equity
= 20000/125000
=0.16 or 16%
Concept:
The operating profit of a corporation is the entire earnings from its core business tasks for a given period, minus interest and taxes.
The return on equity (ROE) is a financial performance indicator that is computed by dividing net income by shareholders' equity. Because shareholders' equity equals a company's assets less its debt, the return on net assets is referred to as ROE.
Given Information:
Sales of Abc company =
Operating profit of the company =
Interest expences of the company =
Tax expenses of the company =
Total equity of the company =
Total debt of the company =
To find:
What is the Return on equity of the company ?
Solution:
Sales of Abc company =
Operating profit of the company =
Interest expenses of the company =
Tax expenses of the company =
Total equity of the company =
Total debt of the company =
Earnings available to the company after deducting interest expances and tax expenses = Operating profit of the company - Interest expenses - Tax expenses.
Earnings available =
Reurn on Equity = Earnings available/Total Equity
=
Hence, The Return on equity of the company is .
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