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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

Kaveri Ltd has equity share capital of ₹10,00,000 (₹10 per share), 10% preference share capital of ₹4,00,000 and reserves of ₹6,00,000. Profit after tax is ₹5,00,000. Return on equity shareholders' funds is calculated on closing equity funds. What is it?

Return on equity is 28.75 percent: profit after tax ₹5,00,000 less preference dividend ₹40,000 gives ₹4,60,000, divided by equity funds of ₹16,00,000. This figure is not among the given options.

  1. A25%
  2. B31.25%Correct
  3. C20.0%
  4. D23.75%

Explanation

Preference dividend = 10% × 4,00,000 = ₹40,000. Earnings for equity = 5,00,000 − 40,000 = ₹4,60,000. Equity funds = 10,00,000 + 6,00,000 = ₹16,00,000. ROE = 4,60,000/16,00,000 = 28.75%, which is not listed; so the closest check shows no option equals it.

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