Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
Mills Ltd., a manufacturer of various flour products wants to estimate its funding requirements for the coming financial year. In the current financial year the company achieved sales of R100 million on assets worth R1000 million and liabilities of R500m. It’s resulting net profit margin was 10% with no dividend being paid as the company is in a high growth phase. All assets and liabilities are considered spontaneous and increase in line with sales. It is expected that sales will grow by 20% in the coming year. Assets are however only utilized up to 80% of total capacity and the spare capacity can be used first before new capacity is installed.
Required:
Determine the Rand value of the spare asset capacity.
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