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Question
(a) The Debt-Equity ratio of a company is 1 : 2. State with reason which of the following transactions would (i) increase; (ii) decrease or (iii) not change the ratio:
(1) Issued equity shares of Rs 1,00,000.
(2) Obtained a short-term loan from bank Rs 1,00,000.
(b) From the following information compute 'Total Assets to Debt Ratio:
| Rs. | |
| Long Term Borrowings Long Term Provisions Current Liabilities Non-Current Assets Current Assets |
3,00,000 1,50,000 75,000 5,40,000 1,35,000 |
Solution
Debt-Equity Ratio= `"Long -term Febt"/"Shareholder's Funds"` =1:2
(1) Issued Equity shares of Rs 1,00,000 will have two effects:
→ It will increase the Share Capital i.e. Shareholder’s Funds
→ It will increase the Cash i.e. Current Assets.
This increase in Shareholder’s Funds will reduce the ratio as shareholder’s funds and debt-equity ratio are inversely related to each other.
(2) Short-term Loan from Bank for Rs 1,00,000 will:
→ Increase the current liabilities
→ Increase the cash
Both increase will not affect the debt-equity ratio as both components of debt-equity ratio are unaffected by this transaction.
(b) Total Assets to Debt Ratio=`"Total Assets"/"Long -term Debt"`
Total Assets = Current Assets + Non-Current Assets
= `1,35,000+5,40,000=6,75,000`
Long-Term Debt = Long-Term Borrowings + Long-Term Provisions
=`3,00,000+1,50,000=4,50,000`
Therefore, Total Assets to Debt Ratio=`(6,75,000)/(4,50,000)=1.5:1`
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