What will be the effect of transaction 'redemption of debentures for cash of ₹30,000' on the company's proprietary ratio (0.6:1)?
Answer & explanation
Correct answer: option 1
The correct answer is option 1- Increase.
Let us assume the shareholder's funds are ₹60,000 and assets are ₹1,00,000.
Shareholders' funds remain unchanged but total assets will decrease by ₹30,000 as cash decreases. So, new assets are 70,000.
Proprietary Ratio = Shareholders’, Funds/Capital employed (or net assets)
= 60,000/ 70,000
= 0.85:1 (Increase)