Fixed Assets ₹5,00,000; Current Assets ₹3,00,000; Equity Share Capital ₹4,00,000; Reserve ₹2,00,000; Long-term Debts ₹40,000. Proprietary Ratio will be :
Answer & explanation
Correct answer: option 3
The correct answer is option 3- 93.75%.
Shareholders funds = Equity Share Capital + Reserve
= 4,00,000 + 2,00,000
= 6,00,000
Capital employed is equal to the long-term debt + shareholders’ funds. Alternatively, it may be taken as net assets which are equal to the total assets – current liabilities.
Total assets = Fixed Assets + Current Assets
= 5,00,000 + 3,00,000
= ₹8,00,000
Current Liabilities = Total Assets - (Equity Share Capital + Reserve + Long-term Debts)
= 8,00,000 - (4,00,000 + 2,00,000 + 40,000)
= 8,00,000 - (6,40,000)
= ₹1,60,000
Capital employed (Net assets) = Total assets – current liabilities
= 8,00,000 - 1,60,000
= 6,40,000
or
Capital employed = Equity Share Capital + Reserve + Long-term Debts
= 4,00,000 + 2,00,000 + 40,000
= 6,40,000
Proprietary Ratio = Shareholders’, Funds/Capital employed
Proprietary Ratio = 6,00,000/6,40,000 X 100
= 93.75 %
** This ratio can also be computed in relation to total assets instead of net assets (capital employed).
If we use total assets then proprietary ratio will be- (Shareholders funds/ Total assets) X 100
= (600000/800000) X 100
= 75%
As the 75% is not given in the option, then it was calculated through net assets or capital employed.