Question

The debt equity ratio of X Ltd. is 0.5 :1, which of the following would
increase/decrease or not change the debt equity ratio?
I. Further issue of equity shares
II. Cash received from debtors
III. Redemption of debentures
IV.
Purchase of goods on credit
​

Answer 1

Given:

Debt equity ratio = 0.5:1

To Find:

Impact of elements o debt equity ratio

Solution:

Let longterm loan be = 5,00,000

Shareholder's funds = 10,00,000

Debt equity ratio = 5,00,000/10,00,000

= 0.5/1

1. Issue of equity shares -  

Shareholders funds after issuance = 5,00,000 + 10,00,000

= 15,00,000

D/e ratio = 5,00,000/15,000,000

= 0.33:1

Thus it will decrease

2. Cash received from debtors

There will be no change as it will increase the current asset in cash form   and decrease other in debtor form.

3. Redemption of debenture

It will decrease the long term loan in debtor reduction form, and no change

in shareholder's funds.

4. Purchase of goods on credit

There will be no change as both elements will not be affected by the transaction as there is a purchase.