Question 56:
Calculate Proprietary Ratio, if Total Assets to Debt Ratio is 2: 1. Debt is `5,00,000. Equity Shares Capital is 0.5 times of debt. Preference Shares Capital is 25% of equity share capital. Net profit before tax is `10,00,000 and rate of tax is 40%.
(CBSE Sample Paper 2020)
Answer:
Total Assets to Debt Ratio is 2: 1
Debt = `5,00,000
Total Assets = 10,00,000 (5,00,000×2)
Equity Shares Capital is 0.5 times of debt
Equity
Shares Capital is(0.5×5,00,000)=2,50,000
Preference Shares Capital is 25% of equity share capital
2,50,000×25/100=62,500
Total Share Capital = Equity Shares Capital+ Preference Shares Capital
Total Share Capital = 2,50,000+62,500
Total
Share Capital = 3,12,500
Rate of tax is 40%
Tax is 4,00,000 (40% of 10,00,000)
Surplus (Net Profit after Tax)=10,00,0004,00,000
Surplus
(Net Profit after Tax)=6,00,000
Share
Holders’ Fund= Total Share Capital+ Surplus
Share Holders’ Fund= 3,12,500+ 6,00,000
Share Holders’ Fund= 3,12,500+ 6,00,000
Share
Holders’ Fund= 9,12,500
Proprietary Ratio= Share Holders’ Fund/Total Assets
Proprietary Ratio= 9,12,500/10,00,000
Proprietary
Ratio 0.912: 1 or 91.2%.
Question 57:
State with reason, whether the Proprietary Ratio will
improve, decline or will not change because of the following transactions if
Proprietary Ratio is 0.8 : 1:
(i) Obtained a loan of ` 5,00,000 from
State Bank of India payable after five years.
(ii) Purchased machinery of ` 2,00,000 by cheque.
(iii) Redeemed 7% Redeemable Preference Shares ` 3,00,000.
(iv) Issued equity shares to the vendor of building purchased for `
7,00,000.
(v) Redeemed 10% redeemable debentures of `
6,00,000.
Answer:
Transaction 
Impact 
Obtained
a loan of ` 5,00,000 from State Bank of
India payable after five years. 
Total
assets increase by 5,00,000 (as cash is coming in).
However, since shareholders' funds remain unchanged, therefore proprietary
ratio will decrease. 
Purchased
machinery of ` 2,00,000 by cheque. 
Total
assets are increasing and decreasing by 2,00,000
simultaneously (as cash is going out and machinery is coming in). Thus, both
numerator and denominator remain unchanged and so proprietary ratio will
not change. 
Redeemed
7% Redeemable Preference Shares `
3,00,000. 
Both
shareholders' funds and total assets decrease by 3,00,000
simultaneously and so proprietary ratio will decrease. 
Issued
equity shares to the vendor of building purchased for `
7,00,000. 
Both
shareholders' funds and total assets increase by 7,00,000
simultaneously and so proprietary ratio will improve. 
Redeemed
10% redeemable debentures of ` 6,00,000 
Total
assets decrease by 6,00,000 (as cash is going out).
However, since shareholders' funds remain unchanged, therefore proprietary
ratio will improve. 
Question
58:
From the following information, calculate:
(a) Proprietary Ratio
(b) Debt to Equity Ratio; and
(c) Total Assets to Debt Ratio.
Current Assets 
`40,00,000 
Current Liabilities 
`20,00,000 
Longterm Borrowings 
`15,00,000 
Longterm Provisions 
`25,00,000 
Noncurrent Assets 
`40,00,000 


Answer:
(a)
Proprietary Ratio
Proprietary
Ratio= Share Holders’ Fund/Total Assets
Proprietary Ratio =20,00,000×100/80,00,000
Proprietary Ratio =25%
(b)
Debt to Equity Ratio
Debt to Equity Ratio= Debt/Equity
Debt to Equity Ratio= 40,00,000/20,00,000
Debt to Equity Ratio= 2/1=2:1
(c)
Total Assets to Debt Ratio
Total Assets to Debt Ratio= Total Assets/Debt
Total Assets to Debt Ratio= 80,00,000/40,00,000
Total Assets to Debt Ratio= 2/1=2:1
Working
Notes:
1. Total Assets=Current Assets+ NonCurrent Assets
Total Assets=40,00,000+40,00,000
Total Assets=80,00,000
2. Share holders’ fund= Total Assets  Current Liabilities  Longterm Provisions  Longterm Borrowings
Share holders’ fund=80,00,00020,00,00025,00,00015,00,000
Share holders’ fund=20,00,000
Question 59:
From the following information, calculate:

(a) 
Proprietary ratio; 



(b) 
Debt to equity ratio; and 



(c) 
Total assets to debts ratio 


Current Debt Capital employed 
`18,00,000 `15,00,000 
Current Assets Working Capital 
`7,50,000 `1,50,000 

Answer;
Proprietary ratio=shareholders’ fund/total asset × 100
Proprietary ratio=3,00,000/21,00,000×100=14.29%
Total asset= capital employed + current liability
21,00,000= 15,00,000 + 6,00,000
Current liability= current assets  working capital
6,00,000= 7,50,000 1,50,000
Shareholders' fund= capital employed noncurrent liabilities
3,00,000= 15,00,000 12,00,000
Debt = total debts current liabilities
12,00,000 =18,00,000 6,00,000
(b) Debt equity ratio
Debt to equity ratio= debt/equity
Debt to equity ratio =12,00,000/3,00,000
Debt to equity ratio =4/1
(c)
Total asset to debt ratio= total asset/ Debt
Total asset to debt ratio=21,00,000/12,00,000
Total asset to debt ratio=1.75:1
Question 60:
If Net Profit before Interest and Tax is `10,00,000 and interest on Longterm Funds is `2,00,000, find Interest Coverage Ratio.
Answer:
Net Profit before Interest and Tax = 10,00,000
Interest = 2,00,000
Interest Coverage Ratio= Net Profit before Interest and Tax/Interest
Interest Coverage Ratio =10,00,000/2,00,000
Interest Coverage Ratio = 5 times
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Class 12 / Volume – 3
Chapter 4 – Accounting Ratios
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