Question

Debt to total assets ratio can be improved by ___________.

• A. Borrowing more
• B. Issue of Debentures
• C. Issue of Equity Shares
• D. Redemption of Debt

Answer 1

Answer: (D)

Redemption of Debt

Debt to total assets ratio signifies the proportion of contribution of debt in the total assets. Total assets can be funded by a combination of equity and debt.

In order to ensure better stability of the capital structure, it is always advisable to keep the debt low so that the available assets are sufficient for the debt to be cleared.

Therefore, Debt to total assets ratio can be improved by decreasing the amount of debt.

For example, debt Rs.7000 and the total assets is Rs.10000

Debt to assets ratio will be 7000/10000 i.e. 70%

That signifies that 70% amount is funded through debt in total assets.

If debts are reduced to Rs.4000, the revised ratio will be 40%.