Colin Black is considering investing a substantial sum in the ordinary shares of Jacks Ltd. Having some accounting knowledge he has extracted the following information from the accounts for the last two financial years.

Issued share capital As at 31 March 2011

$£ 1$ ordinary shares, fully paid As at 31 March 2012

\section*{Reserves}

$f$

Share premium

$£$

100,000 Retained earnings Loan capital

$10 \%$ loan notes 2018-2019

\begin{tabular}{ccc}

For year ended & For year ended \\

31 March 2011 & 31 March 2012 \\

Net profit after tax & $£$ & $£$ \\

\hline

\end{tabular}

Because he was disappointed with the result he obtained when he calculated the return on the equity capital employed, Colin Black has asked for your advice.

\section*{Required:}

(a) Calculate the figures which prompted Colin Black's reaction.

(b) Prepare a memorandum to Colin Black pointing out other information to be considered when comparing the return on equity capital employed over two years as a basis for his investment decision.

(c) Explain why a company builds up and maintains reserves.