Question

Paras Ltd. has a Proprietary Ratio of 25%. To maintain this ratio at 30%, management may ______.

Options

• Increase Equity

• Reduce Debt

• Either Increase Equity or Reduce Debt.

• Increase Current Assets

Answer 1

Paras Ltd. has a Proprietary Ratio of 25%. To maintain this ratio at 30%, management may Either Increase Equity or Reduce Debt.

Explanation:

The Proprietary Ratio is calculated by dividing Shareholders’ Funds (Equity) by Total Assets. To increase this ratio from 25% to 30%, management must increase the proportion of equity relative to total assets. This can be achieved either by issuing fresh share capital to increase the numerator (Shareholders’ Funds), or by paying off external debts to decrease the denominator (Total Assets). Both actions effectively increase the overall ratio.