Question

The Debt-Equity Ratio of a company is 3 : 2. Which of the following transactions will result in increase in this ratio?

• A. Purchase of goods on credit
• B. Issue of Debentures
• C. Issue of Equity Shares
• D. Cash received from Debtors

Hint:

The Debt-Equity ratio increases when the debt component increases or equity decreases.

Answer 1

The Correct Option is B

The Debt-Equity ratio is calculated as: \[ \text{Debt-Equity Ratio} = \frac{\text{Total Debt}}{\text{Equity}} \] - Purchase of goods on credit increases current liabilities but does not affect long-term debt, so it will not increase the ratio. - Issue of debentures increases long-term debt, thus increasing the debt-equity ratio. - Issue of equity shares increases equity capital, which reduces the ratio. - Cash received from debtors only affects current assets and does not impact liabilities, so it does not change the ratio.