Assuming That the Debt to Equity Ratio is 2 : 1, state giving reasons, which of the following transactions would (i) increase; (ii) Decrease; (iii) Not alter Debt to Equity Ratio:

(i) Issue of new shares for cash.
(ii) Conversion of debentures into equity shares
(iii) Sale of a fixed asset at profit.
(iv) Purchase of a fixed asset on long-term deferred payment basis.
(v) Payment to creditors.

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Solution

Let’s take Debt and Equity as Rs 2,00,000 and Rs 1,00,000

$\begin{array}{l} Debt to Equity Ratio = \frac{Debt}{Equity} \\ = \frac{2, 00, 000}{1, 00, 000} = 2 : 1 \end{array}$

(i) Issue of new shares for cash (say Rs 50,000)

$Debt to Equity Ratio = \frac{2, 00, 000}{1, 00, 000 + 50, 000} = 1 .33 : 1(Decrease)$

(ii) Conversion of debentures into equity shares (say Rs 50,000)

$Debt to Equity Ratio = \frac{2, 00, 000}{1, 00, 000 + 50, 000} = 1 .33 : 1(Decrease)$

(iii) Sale of a fixed asset at profit (say Rs 50,000 profit)

$Debt to Equity Ratio = \frac{2, 00, 000}{1, 00, 000 + 50, 000} = 1 .33 : 1(Decrease)$

(iv) Purchase of fixed asset on long term payment basis (say Rs 50,000)

$Debt to Equity Ratio = \frac{2, 00, 000 + 50, 000}{1, 00, 000} = 2 .5 : 1(Increase)$

(v) Payment to creditors (say Rs 50,000)

$Debt to Equity Ratio = \frac{2, 00, 000}{1, 00, 000} = 2 : 1 (No Change)$

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Similar questions

Assuming that the Debt-Equity Ratio is 2 : I, state, giving reasons, which of the following transactions would (I) Increase; (ii) Decrease; (ii.) Not alter the Debt-Equity Ratio :

(i) Issue of new shares (Preference/Equity) for Cash.

(ii) Issue of new shares (Preference/Equity) against purchase of fixed asset.

(iii) Buy-back of its own shares by a Company.

(iv) Issue of Debentures for Cash.

(v) Issue of Debentures against purchase of fixed asset.

(vi) Repayment of Long-term Borrowings.

(vii) Conversion of Debentures into Equity Shares/Preference Shares.

(viii) Sale of a fixed asset at par.

(ix) Sale of a fixed asset at profit.

(x) Sale of a fixed asset at loss.

(xi) Purchase of a fixed asset on a credit of 2 months.

(xii) Purchase of a fixed asset on long-term deferred payment basis.

(xiii) Issue of Bonus Shares.

Assuming that Proprietary Ratio is 0.6 : 1, state giving reasons, whether the ratio will increase, decrease or will not change in each one of the following cases:

(i) Issue of new equity shares for cash.

(ii) Issue of equity shares against purchase of machinery.

(iii) Issue of debentures against purchase of machiney.

(iv) Redemption of debentures for cash.

(v) Conversion of debentures into preference shares.

(vi) Buy-back of its own shares by a company.

(vii) Purchase of a fixed asset for cash.

(viii) Purchase of a fixed asset on long-term deferred payment basis.

(ix) Sale of a fixed asset costing Rs. 1,00,000 for Rs. 80,000.

(x) Sale of a fixed asset costing Rs. 2,00,000 for Rs. 2,50,000.

(xi) Issue of Bonus Shares.

The Debt-Equity Ratio of a Company is 1 : 2. Which of the following would increase, decrease or not change it ?

(i) Repayment of Long term Borrowings of Rs. 40,000.

(ii) Purchased a fixed Asset for Rs. 50,000 on long-term deferred payment basis.

(iii) Issued new equity shared of Rs. 75,000.

(iv) Payment of Dividend Payable.

(v) Goods purchased on Credit.

(vi) Payment to Trade Payables.

The Debt Equity ratio is 3. What will be the impact on the following transactions, and find out the increase, decrease or no change in the ratio.

(i) Buy back of equity shares.

(ii) Purchase of a building on a deferred payment basis.

(iii) Issued shares in consideration of purchase of a machinery.

(iv) Debentures matured but not paid.

Q. Debt to Equity Ratio of a company is 0.5:1. Which of the following suggestions would increase, decrease or not change it:

(i) Issue of Equity Shares:	(ii) Cash received from debtors:
(iii) Redemption of debentures;	(iv) Purchased goods on Credit?

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