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The debt equity ratio of X …

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The debt equity ratio of X Ltd. Is 0.5:1.state with reason whether issue of bones sgare would increase or decrease or not change the debt equity

Posted by Simran Kaur 5 years, 7 months ago

CBSE > Class 12 > Accountancy

1 answers

Gaurav Seth 5 years, 7 months ago

The change in the ratio depends upon the original ratio ratio. Let us assume that external funds are Rs. 5,00,000 and internal funds are Rs. 10,00,000. Now we will analyse the effect of given transactions debt equity ratio.
(a) Assume that Rs. 1,00,000 worth of equity shares are issued. This will increase the internal funds to Rs. 11,00,000. The new ratio will be 0.45 : 1 (5,00,000)/11,00,000). Thus, it clear that further issue of equity shares decreases the debt-equity ratio.
(ii) Cash received from debtors will leave the internal and external funds unchanged as this will only affect the composition of current assets. Hence , the debt-equity ratio will remain unchanged.
This will also leave the ratio unchanged as sale of goods on cash basis neither affect Debt nor equity.
(iv) Assume that Rs. 1,00,000 debentures are redeemed. This will decrease the long-term debt to Rs. 4,00,000. The new ratio will be 0.4 : 1 (4,00,000/10,00,000). Redemption of debentures will decrease the debit-equity ratio.
(v) This will also leave the ratio unchanged as purchase of goods on credit neither affect Debt nor equity.

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