CA- IPC TEST
RATIO ANALYSIS
Duration: 1hour 5Min
MM: 35 Marks
Solution 1:
(a) Capital Gearing Ratio = Fixed Income & Dividends Bearing Securities
Equity Shareholder’s Funds
=
`2,50,000 + `2,00,000
= `4,50,000 = 0.804:1
`4,00,000 + `1,29,875 + `30,000 `5,59875
(b) Quick Assets Ratio = Quick Assets
Current Liabilities
=
`3,50,000 + `1,50,000
= `5,00,000 = 1.204:1
`2,45,125 + `1,00,000 + `70,000 `4,15,125
Or, Quick Assets Ratio = Quick Assets
Quick Liabilities
= `3,50,000 + `1,50,000 = `5,00,000 = 1.587:1
`2,45,125 + `70,000
`3,15,125
(c) Ratios of Sales to Net Worth = Net Sales
Net Worth
=
`10,00,000
= `10,00,000 = 1.2348 times
`2,50,000 + `4,00,000 + `1,29,875 + `30,000
`8,09,875
(d) Return on Capital Employed = Net Operating Profits before Interest & Tax x 100
Capital Employed
=
`3,22,000 - `95,000
x 100
`2,50,000 + `4,00,000 + `1,29,875 + `30,000 + `2,00,000 - `45,000
= `2,27,000 x 100 = 23.53%
`9,64,875
(e) Current Assets Ratio = Current Assets
Current Liabilities
= `1,80,000 + `3,50,000 + `1,50,000 = `6,80,000 = 1.638:1
`2,45,125 + `1,00,000 + `70,000 `4,15,125
(f) Capital Turnover Ratio =
Sales
= `10,00,000 = 1.036 times
Capital Employed
`9,64,875
(g) Debt-Equity Ratio = Debt = `2,00,000 = 0.247:1
Equity `8,09,875
(h) Total Assets Turnover Ratio =
Sales
= `10,00,000 = 0.702 times
Total Assets
`14,25,000
(i) Interest Coverage Ratio =
EBIT
= `3,22,000 + `3,000 - `95,000
Interest on Long Term Debt
10,000
= `2,30,000 = 23 times
`10,000
(j) Preference Dividends Coverage Ratio = Earnings After Tax
Preference Dividends
= `2,30,000 - `10,000 - `1,00,000 = `1,20,000 = 6 times
`20,000
`20,000
(k) Equity Dividends Coverage Ratio = Earnings Available for Equity Shareholders
Equity Dividends
= `1,20,000 - `20,000 = 2 times
`50,000
(l) Return on Net Worth = Net Profit After Tax x 100
Net Worth
= `1,20,000 x 100 = 14.82%
`8,09,875
(m) EPS = Earnings Available for Equity Shareholders
No. of Equity
=
`1,00,000 = `25 per share
4,000 shares
.
.
[
(n) Retention Ratio =
Earnings Retained during the year
x 100
Earnings Available for Equity Shareholders
= `1,00,000 - `50,000 x 100 = 50%
`1,00,000
(o) Debtors Turnover Ratio = Net Credit Sales
Debtors
= 70% of `10,00,000 = 2 times
`3,50,000
Solution 2: Trading and Profit & Loss Account of Mr. X (For the year ending 31 st March, 1999)
Particulars
Amount in (`) Particulars
Amount in (`)
To Cost of Sales (WN1)
10,00,000 By Sales (WN3)
13,33,333
To Gross Profit c/d (WN2)
3,33,333
13,33,333
13,33,333
To Expenses (Bal. Fig)
1,73,333 By Gross Profit b/d
3,33,333
To Net Profit (20% of Sales)
1,60,000
3,33,333
3,33,333
Balance Sheet of Mr. X (As on 31st March, 1999)
Liabilities
Amount in (`) Assets
Amount in (`)
Capital (Opening Balance) (WN6)
6,40,000 Fixed Assets
10,00,000
Profit after adjustment of Drawing
1,60,000 Stock (WN4)
1,00,000
Closing Capital (WN5)
8,00,000 Other Current Assets (WN4)
13,00,000
Liabilities (WN7)
16,00,000
24,00,000
24,00,000
Working Notes:
(1) Calculation of Cost of Sales:
Stock Turnover ratio is 10, so cost of sales is 10 times of stock i.e. `10,00,000 i.e. (1,00,000 x 10).
(2) Calculation of Gross Profit:
Gross profit is 25% of sales or 1/3 i.e. 25/75 of cost of sales. Therefore, gross profit is `3,33,333 (i.e. `10,00,000 x 1/3)
(3) Calculation of Sales:
(`)
Cost of Sales
10,00,000
Add: Gross Profit
3,33,333
Sales
13,33,333
(4) Calculation of Current Assets:
Fixed Assets to Current Assets ratio is 5/7. Fixed Assets are given to be `10,00,000; so current assets are `14,00,000 (10,00,000
x 7/5)
(5) Calculation of Capital:
Fixed Assets/Closing Capital ratio is 5/4; so Capital is `8,00,000 (10,00,000 x 4/5).
(6) Calculation of Opening Capital:
Net Profit/Capital Ratio is 1/5; so opening capital is `6,40,000 (i.e. Closing Capital `8,00,000 – 1/5 of `8,00,000 profit after
adjustment of drawings).
(7) Calculation of Liabilities:
Capital/total liabilities ratio is ½, Capital is `8,00,000; So liabilities are `16,00,000 (i.e. 8,00,000 x 2/1).
Solution 3: (i) Computation of EPS under Mr. Uday Plan
Particulars
Amount in (`)
Sales Revenue (1,00,000 x `500)
5,00,00,000
Less: Variable Cost (1,00,000 x `300)
(3,00,00,000)
Contribution
2,00,00,000
Less: Fixed Costs
(1,20,00,000)
EBIT
80,00,000
Less: Interest
(3,75,000)
EBT
76,25,000
Less: Taxes (40%)
(30,50,000)
EAT
45,75,000
No. of Equity Shares
87,500
EPS
`52.29
Computation of EPS under Urvashi Plan
Particulars
Amount in (`)
Sales Revenue (1,00,000 x 1.3 x `450)
5,85,00,000
Less: Variable Costs (1,00,000 x 1.3 x `300) (3,90,00,000)
Contribution
1,95,00,000
Less: Fixed Costs
(1,20,00,000)
EBIT
75,00,000
Less: Interest
(6,87,500)
EBT
68,12,500
Less: Taxes 40%
(27,25,000)
EAT
40,87,500
No. of Equity Shares
62,500
EPS
`65.40
Ms. Urvashi Perception is correct. Following her plan would increase EPS `65.40 from `52.29.
Working Notes:
(1) Calculation of Interest etc. under Mr. Uday’s Plan:
Sales = 4 `5,00,00,000 = 4
Assets
Assets
Or Assets = `5,00,00,000 = 1,25,00,000
4
30% of assets financed by 10% debt
1,25,00,000 x 0.30 = `37,50,000
Interest = 37,50,000 x 0.10 = `3,75,000
Equity = 1,25,00,000 – 37,50,000 = 87,50,000
No. of Equity Shares = 87,50,000 = 87,500 shares
100
(2) Calculation of Interest etc. under Ms. Urvashi Plan:
Sales = 4.68
Assets
Or Assets = `5,85,00,000 = `1,25,00,000
4.68
Debt = 50%, So Debt = 1,25,00,000 x 0.50 = `62,50,000
Assets
Interest Rate 10 + 1 = 11%
Interest = 62,50,000 x 0.11 = `6,87,500
Equity Capital = 62,50,000
No. of shares = 62,50,000 = 62,500 shares
100
(ii) In case of increase in fixed costs by 15%, EPS would be as under:
Particulars
Amount in (`)
Sales Revenue
5,85,00,000
Less: Variable Costs
(3,90,00,000)
Contribution
1,95,00,000
Less: Fixed Costs (1,20,00,000 + 18,00,000)
(1,38,00,000)
EBIT
57,00,000
Less: Interest
(6,87,500)
EBT
50,12,500
Less: Tax 40%
(20,05,000)
EAT
30,07,500
No. of Equity Shares
62,500
EPS
`48.12
Mr. Uday’s partner is expecting an increase of 15% in fixed costs. If it happens, Urvashi plan would not be profitable, as it will
reduce EPS from `52.28 to `48.12.
Solution 4: Projected daily cash requirement = `1,82,500 = `500
365
Defensive-Interval Ratio
= Quick Current Assets
Daily Cash Requirements
= `40,000 = 80 days
`500