Test 3: Financial Analysis and Planning - Ratio Analysis: answer key

Question 1 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. Aditya Automotive Ltd. manufactures electric drivetrain components and supplies them to automobile manufacturers. Its finance director is evaluating operating profitability and the returns generated for ordinary shareholders during FY 2026-27. All monetary amounts are in ₹ lakh. The following information has been extracted from its financial statements: | Particulars | Amount (₹ lakh) | |---|---:| | Net Sales | 20,000 | | Cost of Goods Sold | 14,000 | | Gross Profit | 6,000 | | Operating Expenses | 2,000 | | Earnings Before Interest and Tax | 4,000 | | Finance Cost | 600 | | Profit Before Tax | 3,400 | | Income Tax at 25% | 850 | | Profit After Tax | 2,550 | Its capital structure comprises equity share capital of ₹5,000 lakh (50 crore? No; 500 lakh equity shares of ₹10 each), reserves and surplus of ₹5,000 lakh, 10% debentures of ₹3,000 lakh and a 10% term loan of ₹3,000 lakh. Other current liabilities are ₹4,000 lakh. Average total assets employed during the year are ₹20,000 lakh. There are no preference shares or exceptional items. The company generated cash from operations before interest and tax of ₹4,800 lakh. Its equity beta is 1.15. The management also reviews the following working-capital information: average inventory ₹1,440 lakh, average trade receivables ₹1,500 lakh, average trade payables ₹1,200 lakh, annual credit sales ₹15,000 lakh and annual net credit purchases ₹10,800 lakh. A 360-day year is adopted for all operational calculations. For profitability calculations, use post-tax profit for Net Profit Margin and the traditional three-step DuPont model. Equity Multiplier is average total assets divided by equity shareholders' funds. The finance director wishes to distinguish operating performance from the effects of taxation and financial leverage.

Calculate the Gross Profit Margin of Aditya Automotive Ltd. for FY 2026-27.

1. 25.00%
2. 30.00% (correct answer)
3. 32.50%
4. 35.00%

Answer: B — 30.00%

Explanation. Step 1: Gross Profit = Sales − Cost of Goods Sold = ₹20,000 − ₹14,000 = ₹6,000 lakh. Step 2: Gross Profit Margin = (Gross Profit ÷ Sales) × 100. Step 3: = (₹6,000 ÷ ₹20,000) × 100 = 30.00%. Option a incorrectly deducts operating expenses before calculating gross profit. Option c uses an incorrect COGS figure. Option d overstates gross profit by ignoring part of the cost of goods sold.

Where it goes wrong. Deducting operating expenses or finance costs while calculating Gross Profit Margin instead of considering only sales and cost of goods sold.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 2 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Calculate the Operating Profit Margin of Aditya Automotive Ltd. for FY 2026-27 using EBIT as the operating profit.

1. 15.00%
2. 18.00%
3. 20.00% (correct answer)
4. 25.00%

Answer: C — 20.00%

Explanation. Operating Profit Margin = EBIT ÷ Sales × 100. EBIT is ₹4,000 lakh and sales are ₹20,000 lakh. Therefore, Operating Profit Margin = (₹4,000 ÷ ₹20,000) × 100 = 20.00%. The same result is obtained by deducting COGS of ₹14,000 lakh and operating expenses of ₹2,000 lakh from sales. Option b incorrectly deducts finance cost from EBIT, while option d incorrectly uses gross profit instead of operating profit.

Where it goes wrong. Including interest and taxation in operating expenses when calculating EBIT-based Operating Profit Margin.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 3 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Determine the post-tax Net Profit Margin of Aditya Automotive Ltd. after independently reconstructing profit after tax from EBIT, finance cost and taxation.

1. 12.75% (correct answer)
2. 15.00%
3. 17.00%
4. 20.00%

Answer: A — 12.75%

Explanation. Step 1: PBT = EBIT − Finance Cost = ₹4,000 − ₹600 = ₹3,400 lakh. Step 2: Tax = 25% of ₹3,400 = ₹850 lakh. Step 3: PAT = ₹3,400 − ₹850 = ₹2,550 lakh. Step 4: Net Profit Margin = PAT ÷ Sales × 100 = (₹2,550 ÷ ₹20,000) × 100 = 12.75%. Option b ignores finance cost, while option d incorrectly uses EBIT as net profit.

Where it goes wrong. Calculating Net Profit Margin using EBIT or PBT instead of post-tax earnings when the question specifies post-tax profit.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 4 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Using the traditional three-step DuPont model, calculate the Return on Equity of Aditya Automotive Ltd. using the given average total assets and equity shareholders' funds.

1. 12.75%
2. 20.00%
3. 21.25%
4. 25.50% (correct answer)

Answer: D — 25.50%

Explanation. Step 1: Net Profit Margin = ₹2,550 ÷ ₹20,000 = 12.75%. Step 2: Asset Turnover = ₹20,000 sales ÷ ₹20,000 average assets = 1.00 time. Step 3: Equity Multiplier = ₹20,000 average assets ÷ (₹5,000 share capital + ₹5,000 reserves) = 2.00 times. Step 4: ROE = 12.75% × 1.00 × 2.00 = 25.50%. Option a omits leverage and therefore represents the return before applying the equity multiplier.

Where it goes wrong. Omitting the Equity Multiplier and reporting an asset-based return as Return on Equity.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 5 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. Vistara Mobility Ltd. manufactures and distributes electric mobility systems and charging infrastructure. Its board is assessing the relationship between accounting profitability and market valuation before considering a further equity issue. The following financial information relates to FY 2026-27. All monetary amounts are in ₹ lakh unless otherwise indicated. | Particulars | Amount (₹ lakh) | |---|---:| | Revenue from Operations | 30,000 | | Cost of Goods Sold | 21,000 | | Gross Profit | 9,000 | | Operating Expenses | 4,000 | | EBIT | 5,000 | | Finance Cost | 1,000 | | Profit Before Tax | 4,000 | | Tax at 25% | 1,000 | | Profit After Tax | 3,000 | Equity share capital is ₹5,000 lakh, divided into 500 lakh equity shares of ₹10 each. Reserves and surplus are ₹7,000 lakh. The company has 10% debentures of ₹4,000 lakh and a 15% term loan of ₹4,000 lakh. Other current liabilities amount to ₹10,000 lakh. There are no preference shareholders, and the entire profit after tax belongs to ordinary equity shareholders. Cash generated from operations before interest and tax is ₹6,200 lakh. Equity beta is 1.20. The current market price of each equity share is ₹60. The company distributed a total equity dividend of ₹1,000 lakh during the year. The estimated market value of its equity is therefore based on the stated market price and outstanding shares. The market value of all liabilities is ₹18,000 lakh, while the estimated replacement cost of total assets is ₹40,000 lakh. Additional operating information includes average inventory of ₹1,500 lakh, average receivables of ₹2,000 lakh, average payables of ₹1,500 lakh, annual credit sales of ₹24,000 lakh and annual net credit purchases of ₹18,000 lakh. The company uses a 360-day year. The board requires analysis of EPS, P/E, dividend payout, dividend yield, Market-to-Book Ratio and Tobin's Q. Assume no bonus issue, fresh share issue or change in the number of outstanding equity shares during the year.

Calculate the Earnings Per Share (EPS) of Vistara Mobility Ltd. for FY 2026-27.

1. ₹5.00
2. ₹6.00 (correct answer)
3. ₹7.50
4. ₹8.00

Answer: B — ₹6.00

Explanation. EPS = Net Profit Available to Equity Shareholders ÷ Number of Equity Shares Outstanding. There are no preference shareholders, so the entire PAT of ₹3,000 lakh is available to equity shareholders. Outstanding equity shares = ₹5,000 lakh ÷ ₹10 face value = 500 lakh shares. Therefore, EPS = ₹3,000 lakh ÷ 500 lakh shares = ₹6 per share. Option a incorrectly deducts an assumed dividend; option c uses an incorrect share count.

Where it goes wrong. Using the equity share capital amount directly as the denominator without converting it into the number of outstanding equity shares.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 6 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Determine the Price-Earnings Ratio of Vistara Mobility Ltd. using its current market price and calculated EPS.

1. 8 times
2. 12 times
3. 10 times (correct answer)
4. 15 times

Answer: C — 10 times

Explanation. Step 1: EPS = PAT ÷ Outstanding Shares = ₹3,000 lakh ÷ 500 lakh = ₹6. Step 2: P/E Ratio = Market Price per Share ÷ EPS. Step 3: = ₹60 ÷ ₹6 = 10 times. Option a uses an incorrect EPS of ₹7.50. Option b uses an incorrect denominator of ₹5, and option d incorrectly divides by ₹4. The market price must be divided by earnings per share, not total company earnings.

Where it goes wrong. Reversing EPS and market price or using total PAT directly instead of earnings per share.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 7 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Calculate the Dividend Payout Ratio and Dividend Yield of Vistara Mobility Ltd. for FY 2026-27, respectively.

1. 33.33% and 3.33% (correct answer)
2. 40.00% and 5.00%
3. 33.33% and 5.00%
4. 25.00% and 3.33%

Answer: A — 33.33% and 3.33%

Explanation. Step 1: DPS = Total Equity Dividend ÷ Outstanding Shares = ₹1,000 lakh ÷ 500 lakh = ₹2. Step 2: EPS = ₹6. Dividend Payout Ratio = DPS ÷ EPS × 100 = 2 ÷ 6 × 100 = 33.33%. Step 3: Dividend Yield = DPS ÷ Market Price × 100 = 2 ÷ 60 × 100 = 3.33%. Option b uses incorrect per-share figures, while option c confuses dividend yield with another return percentage.

Where it goes wrong. Using face value instead of market price to calculate dividend yield, or confusing the payout ratio with the dividend yield.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 8 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Calculate the Market-to-Book Ratio and Tobin's Q of Vistara Mobility Ltd. using the information provided.

1. 2.50 times and 1.50 times
2. 2.50 times and 1.20 times (correct answer)
3. 3.00 times and 1.20 times
4. 2.00 times and 1.00 time

Answer: B — 2.50 times and 1.20 times

Explanation. Step 1: Book Value per Share = Net Worth ÷ Equity Shares = (₹5,000 + ₹7,000) lakh ÷ 500 lakh = ₹24. Step 2: Market-to-Book Ratio = ₹60 ÷ ₹24 = 2.50 times. Step 3: Market Value of Equity = 500 lakh × ₹60 = ₹30,000 lakh. Step 4: Tobin's Q = (Market Value of Equity + Market Value of Liabilities) ÷ Replacement Cost of Assets = (30,000 + 18,000) ÷ 40,000 = 1.20 times.

Where it goes wrong. Using book value instead of market value of equity in Tobin's Q, or confusing book value per share with market value per share.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 9 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. A company reports annual sales of ₹16,000 lakh, EBIT of ₹3,000 lakh and annual interest expense of ₹500 lakh. Its income tax rate is 20%. There are no exceptional items or preference dividends. Calculate the post-tax Net Profit Margin.

A company reports annual sales of ₹16,000 lakh, EBIT of ₹3,000 lakh and annual interest expense of ₹500 lakh. Its income tax rate is 20%. There are no exceptional items or preference dividends. Calculate the post-tax Net Profit Margin.

1. 10.00%
2. 15.00%
3. 12.00%
4. 12.50% (correct answer)

Answer: D — 12.50%

Explanation. PBT = EBIT − Interest = ₹3,000 − ₹500 = ₹2,500 lakh. Tax = 20% × ₹2,500 = ₹500 lakh. PAT = ₹2,500 − ₹500 = ₹2,000 lakh. Net Profit Margin = PAT ÷ Sales × 100 = ₹2,000 ÷ ₹16,000 × 100 = 12.50%. Option b incorrectly uses EBIT as profit, while option c does not correctly calculate the tax-adjusted profit.

Where it goes wrong. Applying the tax rate directly to EBIT without deducting interest first when calculating post-tax net profit.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 10 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. The following information is available for a company: Opening Total Assets: ₹20,000 lakh; Closing Total Assets: ₹22,000 lakh; Opening Current Liabilities: ₹2,000 lakh; Closing Current Liabilities: ₹4,000 lakh; EBIT: ₹3,600 lakh; Tax Rate: 25%. Calculate Post-tax Return on Capital Employed (ROCE), using average capital employed.

The following information is available for a company: Opening Total Assets: ₹20,000 lakh; Closing Total Assets: ₹22,000 lakh; Opening Current Liabilities: ₹2,000 lakh; Closing Current Liabilities: ₹4,000 lakh; EBIT: ₹3,600 lakh; Tax Rate: 25%. Calculate Post-tax Return on Capital Employed (ROCE), using average capital employed.

1. 15.00% (correct answer)
2. 17.50%
3. 12.50%
4. 20.00%

Answer: A — 15.00%

Explanation. Opening Capital Employed = ₹20,000 − ₹2,000 = ₹18,000 lakh. Closing Capital Employed = ₹22,000 − ₹4,000 = ₹18,000 lakh. Average Capital Employed = ₹18,000 lakh. Post-tax ROCE = EBIT(1 − Tax Rate) ÷ Average Capital Employed × 100 = ₹3,600 × 75% ÷ ₹18,000 × 100 = 15.00%. Option d is the pre-tax ROCE; option c understates the return by applying an incorrect tax adjustment.

Where it goes wrong. Using pre-tax EBIT in the numerator despite the express requirement to calculate post-tax ROCE.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 11 · 2 marks · Financial Analysis and Planning - Ratio Analysis · medium

Scenario. A company reports EBIT of ₹3,600 lakh, an income tax rate of 25% and average total assets of ₹15,000 lakh. Calculate Return on Total Assets (ROTA) using the post-tax EBIT method.

A company reports EBIT of ₹3,600 lakh, an income tax rate of 25% and average total assets of ₹15,000 lakh. Calculate Return on Total Assets (ROTA) using the post-tax EBIT method.

1. 15.00%
2. 20.00%
3. 18.00% (correct answer)
4. 24.00%

Answer: C — 18.00%

Explanation. ROTA = EBIT(1 − t) ÷ Average Total Assets × 100. EBIT after tax = ₹3,600 × (1 − 0.25) = ₹2,700 lakh. ROTA = ₹2,700 ÷ ₹15,000 × 100 = 18.00%. Option a uses ₹2,250 lakh as after-tax EBIT, implying an incorrect tax rate. Option b uses pre-tax EBIT. The post-tax return must be calculated using the specified tax adjustment before dividing by total assets.

Where it goes wrong. Confusing Return on Total Assets with pre-tax ROCE or using an incorrect asset denominator.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 12 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company generates post-tax earnings of ₹2,400 lakh on annual sales of ₹20,000 lakh. Its total investment in the business is ₹16,000 lakh. Calculate ROI by decomposing it into Profitability Ratio and Investment Turnover Ratio.

A company generates post-tax earnings of ₹2,400 lakh on annual sales of ₹20,000 lakh. Its total investment in the business is ₹16,000 lakh. Calculate ROI by decomposing it into Profitability Ratio and Investment Turnover Ratio.

1. 12.00%
2. 15.00% (correct answer)
3. 18.00%
4. 20.00%

Answer: B — 15.00%

Explanation. Step 1: Profitability Ratio = Earnings ÷ Sales = ₹2,400 ÷ ₹20,000 = 12%. Step 2: Investment Turnover Ratio = Sales ÷ Investment = ₹20,000 ÷ ₹16,000 = 1.25 times. Step 3: ROI = Profitability Ratio × Investment Turnover = 12% × 1.25 = 15.00%. Alternatively, ROI = ₹2,400 ÷ ₹16,000 × 100 = 15%. Option a ignores investment turnover, while option c applies an incorrect turnover multiplier.

Where it goes wrong. Calculating the profitability ratio alone and treating it as ROI without multiplying it by investment turnover.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 13 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports the following components under the five-step DuPont model: Tax Burden = 0.75; Interest Burden = 0.80; Operating Profit Margin = 12%; Asset Turnover = 1.50 times; Financial Leverage = 2.00 times. Calculate its Return on Equity.

A company reports the following components under the five-step DuPont model: Tax Burden = 0.75; Interest Burden = 0.80; Operating Profit Margin = 12%; Asset Turnover = 1.50 times; Financial Leverage = 2.00 times. Calculate its Return on Equity.

1. 18.00%
2. 20.00%
3. 24.00%
4. 21.60% (correct answer)

Answer: D — 21.60%

Explanation. The five-step DuPont formula is ROE = Tax Burden × Interest Burden × Operating Profit Margin × Asset Turnover × Financial Leverage. Substitution: 0.75 × 0.80 × 0.12 × 1.50 × 2.00 = 0.216. Therefore, ROE = 21.60%. Option c results from omitting the tax burden or using an incorrect tax adjustment. Option a omits financial leverage, while option b does not correctly multiply all five components.

Where it goes wrong. Omitting either the tax burden or interest burden component, or confusing the five-step decomposition with the traditional three-step DuPont model.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 14 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports a Return on Equity of 30%, Net Profit Margin of 10% and Total Asset Turnover of 1.50 times. Using the traditional three-step DuPont model, determine its Equity Multiplier.

A company reports a Return on Equity of 30%, Net Profit Margin of 10% and Total Asset Turnover of 1.50 times. Using the traditional three-step DuPont model, determine its Equity Multiplier.

1. 2.00 times (correct answer)
2. 1.50 times
3. 2.50 times
4. 3.00 times

Answer: A — 2.00 times

Explanation. Three-step DuPont formula: ROE = Net Profit Margin × Total Asset Turnover × Equity Multiplier. Substituting: 30% = 10% × 1.50 × Equity Multiplier. Therefore, Equity Multiplier = 30% ÷ 15% = 2.00 times. Option b ignores the required multiplier. Option c overstates leverage, while option d effectively divides ROE by the margin alone without considering asset turnover.

Where it goes wrong. Forgetting to isolate the Equity Multiplier after incorporating both the net profit margin and asset turnover components.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 15 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company reports PAT of ₹2,400 lakh. It has 10% preference share capital of ₹2,000 lakh and 40 lakh equity shares outstanding. Calculate EPS available to ordinary equity shareholders.

A company reports PAT of ₹2,400 lakh. It has 10% preference share capital of ₹2,000 lakh and 40 lakh equity shares outstanding. Calculate EPS available to ordinary equity shareholders.

1. ₹60
2. ₹50
3. ₹55 (correct answer)
4. ₹45

Answer: C — ₹55

Explanation. Step 1: Preference Dividend = ₹2,000 lakh × 10% = ₹200 lakh. Step 2: Profit Available to Equity Shareholders = PAT − Preference Dividend = ₹2,400 − ₹200 = ₹2,200 lakh. Step 3: EPS = ₹2,200 lakh ÷ 40 lakh equity shares = ₹55 per share. Option a divides total PAT directly by equity shares and ignores preference dividend. Option b uses an incorrect preference dividend deduction.

Where it goes wrong. Failing to deduct preference dividend before calculating the earnings available to ordinary equity shareholders.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 16 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A listed company earns net profit of ₹1,800 lakh available to equity shareholders. It has 150 lakh outstanding equity shares and its market price per share is ₹240. Calculate the P/E Ratio.

A listed company earns net profit of ₹1,800 lakh available to equity shareholders. It has 150 lakh outstanding equity shares and its market price per share is ₹240. Calculate the P/E Ratio.

1. 15 times
2. 20 times (correct answer)
3. 24 times
4. 30 times

Answer: B — 20 times

Explanation. Step 1: EPS = Profit Available to Equity Shareholders ÷ Outstanding Shares = ₹1,800 lakh ÷ 150 lakh = ₹12 per share. Step 2: P/E Ratio = Market Price per Share ÷ EPS = ₹240 ÷ ₹12 = 20 times. Option a uses an EPS of ₹16. Option c divides market price by an incorrectly computed earnings figure, while option d understates EPS. Market value must be compared with per-share earnings.

Where it goes wrong. Using total earnings directly against market price instead of first calculating EPS from the outstanding equity shares.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 17 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company declares an equity dividend of ₹6 per share. Its EPS is ₹15 and current market price is ₹120 per share. Determine the Dividend Payout Ratio and Dividend Yield, respectively.

A company declares an equity dividend of ₹6 per share. Its EPS is ₹15 and current market price is ₹120 per share. Determine the Dividend Payout Ratio and Dividend Yield, respectively.

1. 33.33% and 4.00%
2. 50.00% and 5.00%
3. 40.00% and 4.00%
4. 40.00% and 5.00% (correct answer)

Answer: D — 40.00% and 5.00%

Explanation. Dividend Payout Ratio = DPS ÷ EPS × 100 = ₹6 ÷ ₹15 × 100 = 40.00%. Dividend Yield = DPS ÷ Market Price × 100 = ₹6 ÷ ₹120 × 100 = 5.00%. Option a uses an incorrect payout denominator and dividend yield. Option b confuses the dividend payout with another earnings distribution percentage. Option c calculates the payout correctly but understates the dividend yield.

Where it goes wrong. Using EPS instead of market price in the dividend yield calculation, or using market price instead of EPS in the dividend payout calculation.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 18 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company has equity share capital of ₹2,000 lakh and reserves and surplus of ₹3,000 lakh. It has 100 lakh outstanding equity shares. The average market price per share is ₹75. Calculate the Market Value to Book Value Ratio.

A company has equity share capital of ₹2,000 lakh and reserves and surplus of ₹3,000 lakh. It has 100 lakh outstanding equity shares. The average market price per share is ₹75. Calculate the Market Value to Book Value Ratio.

1. 1.50 times (correct answer)
2. 1.25 times
3. 2.00 times
4. 2.50 times

Answer: A — 1.50 times

Explanation. Step 1: Net Worth = Equity Share Capital + Reserves = ₹2,000 + ₹3,000 = ₹5,000 lakh. Step 2: Book Value per Share = ₹5,000 lakh ÷ 100 lakh shares = ₹50. Step 3: Market-to-Book Ratio = Market Price per Share ÷ Book Value per Share = ₹75 ÷ ₹50 = 1.50 times. Option d incorrectly uses equity share capital alone as the book-value denominator, while option b understates net worth.

Where it goes wrong. Ignoring reserves and surplus while determining book value per share or confusing market value of a share with its paid-up face value.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 19 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company has 2 crore outstanding equity shares trading at ₹160 per share. The market value of its liabilities is ₹80 crore and estimated replacement cost of assets is ₹360 crore. Calculate Tobin's Q Ratio.

A company has 2 crore outstanding equity shares trading at ₹160 per share. The market value of its liabilities is ₹80 crore and estimated replacement cost of assets is ₹360 crore. Calculate Tobin's Q Ratio.

1. 0.90 times
2. 1.00 time
3. 1.11 times (correct answer)
4. 1.25 times

Answer: C — 1.11 times

Explanation. Step 1: Market Value of Equity = 2 crore shares × ₹160 = ₹320 crore. Step 2: Market Value of Equity and Liabilities = ₹320 + ₹80 = ₹400 crore. Step 3: Tobin's Q = Market Value of Equity and Liabilities ÷ Estimated Replacement Cost of Assets = ₹400 ÷ ₹360 = 1.1111, approximately 1.11 times. Option b omits liabilities or uses an incorrect replacement-cost amount. Option d overstates the numerator.

Where it goes wrong. Using book value of equity or total assets instead of the market value of equity and liabilities and estimated replacement cost of assets.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis

Question 20 · 2 marks · Financial Analysis and Planning - Ratio Analysis · hard

Scenario. A company currently has annual sales of ₹8,000 lakh, EBIT margin of 10% and capital employed of ₹5,000 lakh. Management proposes an expansion that will increase sales by 25%, improve EBIT margin to 12% and increase capital employed by 20%. Assuming a constant tax rate of 25%, determine the new post-tax ROCE and the increase over the existing post-tax ROCE.

A company currently has annual sales of ₹8,000 lakh, EBIT margin of 10% and capital employed of ₹5,000 lakh. Management proposes an expansion that will increase sales by 25%, improve EBIT margin to 12% and increase capital employed by 20%. Assuming a constant tax rate of 25%, determine the new post-tax ROCE and the increase over the existing post-tax ROCE.

1. 12.00% and no increase
2. 14.00% and 2.00 percentage points
3. 16.00% and 4.00 percentage points
4. 15.00% and 3.00 percentage points (correct answer)

Answer: D — 15.00% and 3.00 percentage points

Explanation. Existing EBIT = ₹8,000 × 10% = ₹800 lakh. Existing post-tax ROCE = (800 × 75%) ÷ 5,000 × 100 = 12%. New Sales = ₹8,000 × 125% = ₹10,000 lakh. New EBIT = ₹10,000 × 12% = ₹1,200 lakh. New Capital Employed = ₹5,000 × 120% = ₹6,000 lakh. New post-tax ROCE = (1,200 × 75%) ÷ 6,000 × 100 = 15%. Improvement = 3 percentage points.

Where it goes wrong. Applying the improved operating margin to existing sales or ignoring the additional capital employed while calculating the expansion project's post-tax return.

Authority. ICAI SM: Financial Management and Strategic Management, Financial Analysis and Planning - Ratio Analysis