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Question
Debt-Equity Ratio of Z Ltd. is 2: 1. State with reason whether the following transactions will improve, decline or will not change the debt-equity ratio:
- Conversion of ₹ 3,00,000, 9% debentures into equity shares.
- Cash received from debtors ₹ 1,00,000.
- Redemption of ₹ 10,00,000, 11% debenture.
- Purchase of goods on credit ₹ 4,00,000.
Solution
| Transaction | Effect | Reason |
| (i) | Decrease | Total long-term debts have decreased and total shareholders' funds have increased by the same amount. Therefore, Debt to Equity ratio will decrease. |
| (ii) | No change | Both long-term debts and shareholders' Funds will remain unchanged. Therefore, Debt to Equity Ratio will not change. |
| (iii) | No change | Long-term debt are not affected because debentures redeemed are current liabilities. Because long-term liabilities maturing within 12 months are shown as current liabilities under current maturities of long-term debts. Shareholder's Fund will also remain unchanged. Therefore, Debt to Equity Ratio will not change. |
| (iv) | No change | Both long-term debts and shareholders' funds will remain unchanged. Therefore, Debt to Equity Ratio will not change. |
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