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 computed as: \[ \text{Debt-Equity Ratio} = \frac{\text{Total Debt}}{\text{Equity}} \] - Purchasing goods on credit raises current liabilities but does not impact long-term debt, thus it will not elevate the ratio. - Issuing debentures augments long-term debt, consequently increasing the debt-equity ratio. - Issuing equity shares boosts equity capital, which leads to a decrease in the ratio. - Receiving cash from debtors solely affects current assets and does not influence liabilities, therefore it does not alter the ratio.