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Question
Assuming that the Debt-Equity ratio is 2. State giving reasons whether this ratio would increase, decrease or remain unchanged in the following cases (Any Four)
(a) Purchase of fixed assets on a credit of 2 months
(b) Purchase of fixed assets on a long term deferred payment basis.
(c) Issue of New shares for cash
(d) Issued of Bonus shares
(e) Sale of fixed asset at a loss of Rs 3,000
Solution
|
Cases |
Effect |
Reason |
|
Purchase of Fixed Assets on Credit of 2 months |
No Change |
Purchase of Fixed Assets neither affects the equity nor affects the debts. Thus, debt equity ratio will remain the same. |
|
Purchase of Fixed Assets on long term deferred payment basis |
Increase |
Purchase of Fixed Assets on long term deferred payment basis results in an increase in the debts. Therefore, debt equity ratio will increase. |
|
Issue of New Shares for cash
|
Decrease |
Issue of New Shares for cash results in an increase in the shareholders’ funds. So, debt equity ratio as a result of this will decrease. |
|
Issue of Bonus shares
|
No change |
Issue of Bonus shares neither affects the shareholders’ funds nor affects the debts. Thus, debt equity ratio will remain the same. |
|
Sale of Fixed Assets at a loss of Rs 3,000 |
Increase |
Sale of Fixed Assets at a loss results in decrease in shareholders’ funds by the amount of loss. While on the other hand, it does not affect the debts. Therefore, debt equity ratio will increase. |
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Amount Rs |
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