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CA Final · Financial Reporting · Analysis of Financial Statements

Kaveri Components Ltd has: profit before interest and tax Rs 9,00,000; interest on borrowings Rs 3,00,000; tax rate 25%; equity shareholders' funds Rs 20,00,000; long-term debt Rs 10,00,000. Return on equity (profit after tax / equity) is:

Return on equity is 22.5%. Profit before tax is Rs 6,00,000 after interest, tax at 25% is Rs 1,50,000, leaving profit after tax of Rs 4,50,000. Dividing by equity of Rs 20,00,000 gives 22.5%. Ignoring tax would wrongly give 30%.

  1. A22.5%Correct
  2. B30.0%
  3. C45.0%
  4. D33.75%

Explanation

PBT = 9,00,000 - 3,00,000 = 6,00,000. Tax at 25% = 1,50,000, so PAT = 4,50,000. ROE = 4,50,000/20,00,000 = 22.5%. Using PBT gives 30%, which ignores tax.

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