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Question : Equity share Capital Rs.20,00,000; Reserves Rs.5,00,000; Debenture Rs.10,00,000; Current liabilities Rs.8,00,000. Debt equity ratio will be -

Option 1: 0.32:1

Option 2: 0.40:1

Option 3: 0.72:1

Option 4: 0.50:1


Team Careers360 20th Jan, 2024
Answer (1)
Team Careers360 23rd Jan, 2024

Correct Answer: 0.40:1


Solution : The debt-to-equity ratio is calculated by dividing a company's total liabilities by the sum of its shareholders' equity. For the majority of businesses and industries, a desirable debt-to-equity ratio is around 2.0.

Hence the debt equity ratio is - 

Debentures / (Equity share capital + Reserves)

1000000 / (2000000 + 500000) 

0.40:1

Hence the correct answer is option 2.

Note :- Current liability is not included in debt for the purpose of Debt-equity ratio, since only Long term debt is taken to calculate this ratio.

 

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