1.

Raman is a potential investor who wishes to be a part of Equity Linked Saving Scheme (ELSS). He has given the particulars of two companies to seek your advice for investment. Compare the Return on Equity of the two companies and suggest to Raman where he should invest.ParticularsAlpha Ltd. (Rupees)Beta Ltd. (Rupees)Total Capital Invested20,00,00020,00,000Owned Funds10,00,00010,00,000Interest on Borrowings from Bank60,00050,000Cost of Goods Sold per month7,00,0008,50,000Monthly Sales Revenue10,00,00015,00,000Salaries2,40,0003,60,000Utilities75,0001,00,000Depreciation5,5006,000Tax Rate20%25%

Answer»

Return on Equity = Profit after interest and tax / Equity × 100

erest and tax / Equity × 100 PAlpha Ltd. Beta Ltd. 
Sales Revenue (Yearly) 1,20,00,0001,80,00,000
COGS (Yearly) 84,00,0001,02,00,000
GROSS MARGIN36,00,00078,00,000 
Less :
(i) Salaries Paid
(ii) Interest paid
(iii) Utilitie
(iv) Depreciation		2,40,000 60,000
75,000 5,500		3,60,000 50,000 1,00,000 6,000
Profit after interest before tax32,19,50072,84,000
Less Tax6,43,90018,21,000
Profit after interest and tax 25,75,60054,63,000
R, Profit after interest and tax/Equity x 10025,75,600/10,00,000 x 100 = 257.56%54,63,000/10,00,000 x 100 = 546.3%
Return on Equity257.56%546.3%

Raman should invest in Beta Company as its ROE is better than that of Alpha Company


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