Question

Debt-Equity Ratio can be calculated as ______?

Options

• Long-term Debt's/Shareholders Fund

• Shareholders Fund/Long-term Debt's

• Both the above alternatives

• None of these

Answer 1

Debt-Equity Ratio can be calculated as Long-term Debt's/Shareholders Fund.

Explanation:

The Debt Equity Ratio (DER) is a ratio that compares long-term debt to equity. Outsiders feel more safe when the debt component of overall long-term capital used is lower. From a security standpoint, a capital structure with less debt and more equity is preferable since it lowers the risk of bankruptcy. A debt equity ratio of 2:1 is generally seen as safe. It's calculated like this:

Debt-Equity ratio = Long-term Debt's/ Shareholders Fund

Where Shareholders Funds = Equity Share Capital + Reserves and Surplus (equity) - Fictitious Assets + Preference Share Capital.