Q4 During the Accounting year, the company earned 20% return on its capital employed amounting to â ¹ 30,00,000 - Accountancy - Accounting Ratios

Question

Q4 During the Accounting year, the company earned 20% return on its
capital employed amounting to â‚¹
30,00,000 , includes 14% Long term debts
â‚¹ 20,00,000
Interpret the following :-
(1) Amount of Gain & Gain percentage to proprietor of funds by
raising Long term debts if tax rate is 40 %
(2) Is it worthwhile to raise Long term debts ?

Nitin Verma · Accepted Answer

Dear Student,
Capital Employed = Rs 30,00,000Loan = Rs 20,00,000Equity =Rs 10,00,000Return =                       Rs 6,00,000(30,00,000×20%)Less : Interest on loan  = Rs 2,80,000(20,00,000×14%)Earning before Tax       = Rs 3,20,0000Less: Tax(40%)           = Rs 1,28,000Gain to Equity              = Rs 1,92,000Gain % to Equity=         1,92,00010,00,000= 19
2%       
Note : A company should take a loan or not it depends on so many
factors But if company is able to make so much amount of earnings
to pay interest regularly, it can take a loan

Regards