Question

Calculate the Proprietary Ratio if the Total Assets to Debt Ratio is 2 : 1. Debt is ₹ 5,00,000. Equity Shares Capital is 0.5 times the debt. Preference Shares Capital is 25% of equity share capital. Net profit before tax is ₹ 10,00,000, and the rate of tax is 40%.

Answer 1

Calculation of Total Assets:

\[\text{Total Assets to Debt Ratio} = \frac{\text{Total Assets}}{\text{Debt}}\]

$$2 = \frac{\text{Total Assets}}{5,00,000}$$

$$\text{Total Assets} = 2 \times 5,00,000$$

$$ {\text{Total Assets} = ₹ 10,00,000}$$

Calculation of Shareholders’ Funds (Proprietor’s Funds):

1. Equity Share Capital:

$$\text{Equity Share Capital} = 0.5 \times \text{Debt}$$

$$\text{Equity Share Capital} = 0.5 \times ₹ 5,00,000 = ₹ 2,50,000$$

2. Preference Share Capital:

$$\text{Preference Share Capital} = 25\% \times \text{Equity Share Capital}$$

$$\text{Preference Share Capital} = 0.25 \times ₹ 2,50,000 = ₹ 62,500$$

3. Surplus (Net Profit after Tax):

$$\text{Tax} = 40\% \text{ of } ₹ 10,00,000 = ₹ 4,00,000$$

$$\text{Net Profit after Tax (Surplus)} = ₹ 10,00,000 - ₹ 4,00,000 = ₹ 6,00,000$$

Total Shareholders’ Funds:

$$\text{Shareholders’ Funds} = \text{Equity Share Capital} + \text{Preference Share Capital} + \text{Net Profit after Tax}$$

$$\text{Shareholders’ Funds} = ₹ 2,50,000 + ₹ 62,500 + ₹ 6,00,000$$

$${\text{Shareholders’ Funds} = ₹ 9,12,500}$$

Calculation of Proprietary Ratio:

$$\text{Proprietary Ratio} = \frac{\text{Shareholders' Funds}}{\text{Total Assets}}$$

$$\text{Proprietary Ratio} = \frac{9,12,500}{10,00,000} = 0.9125$$

Proprietary Ratio = 0.912 : 1 or 91.2%