Question 41:

Calculate Debt to Equity Ratio: Total Assets ₹14,00,000, Total Debt ₹12,00,000; Capital Employed ₹10,00,000.

 

Answer:

 

Debt to Equity Ratio = Debt÷Equity Ratio

Debt to Equity Ratio = 8,00,000/2,00,000=4/1

Debt to Equity Ratio= 4:1

Working note:

Total Assets=Total Liabilities

14,00,000=14,00,000

Equity=Total Liabilities-Total Debt

2,00,000=14,00,000-12,00,000

Debt (Non- Current Liabilities)= Capital Employed- Equity

8,00,000=10,00,000-2,00,000

Question 42:

Capital Employed ₹8,00,000; Shareholders' Funds ₹2,00,000. Calculate Debt to Equity Ratio.

Answer:

Shareholders’ Funds = 2,00,000

Capital Employed = 8,00,000

Long- Term Debts = Capital Employed − Shareholders’ Funds

= 8,00,000 − 2,00,000 = 6,00,000

Debt equity ratio= Long-term Debt /equity=6,00,000/2,00,000=3:1

 

Question 43:

King Ltd. has Current Ratio of 2.5:1. Its Working Capital is ₹1,20,000. Total Assets are of ₹3,80,000 and Total Debt of ₹2,80,000.

Calculate Debt to Equity Ratio.

Answer:

Current Liabilities=x

Current Assets=2.5x

Working Capital =1,20,000

 

Debt to Equity Ratio= Debt÷Equity Ratio

Debt to Equity Ratio=2,00,000/1,00,000=2/1

Debt to Equity Ratio=2:1

 

Working note:

Working Capital= Current Assets-- Current Liabilities

1,20,000=2.5x-x

1,20,000=1.5x

X=1,20,000/1.5=80,000

Debt (Non- Current Liabilities)= Total Debt-Current Liabilities

2,00,000=2,80,000-80,000

Equity= Total Liabilities-Total Debt

1,00,000=3,80,000 - 2,80,000.

 

Question 44:

Monica Ltd. has Quick Ratio of 1.5: 1 Its Working Capital is ₹1,20,000 and its inventories are of ₹80,000. Total Assets of ₹3,80,000 and Total Debts of ₹2,80,000.

Calculate Debt to Equity Ratio.

Answer:

Debt to Equity Ratio = Debt÷Equity Ratio

Debt to Equity Ratio = 2,00,000/1,00,000=2/1

Question 45:

When Debt to Equity Ratio is 2, state giving reason, whether this ratio will increase or decrease or will have no change in each of the following cases:
(i) Sale of Land (Book value ₹4,00,000) for ₹5,00,000;

(ii) Issue of Equity Shares for the purchase of Plant and Machinery worth ₹10,00,000;

(iii) Issue of Preference Shares for redemption of 13% Debentures, worth ₹10,00,000.

 

Answer:

Debt-Equity Ratio = 2:1

Let Long-term loan = ₹20,00,000

Shareholders’ Funds = ₹10,00,000

(i) Sale of Land (Book Value ₹4,00,000) for ₹5,00,000-Decrease

Reason: This transaction will result increase in Shareholders’ Funds by ₹1,00,000 as profit on sale of Land.

Shareholders’ Funds after adjusting profit on sale of land = 10,00,000 + 1,00,000 = ₹11,00,000

Debt equity ratio= 20,00,000/11,00,000=1.81:1

 

(ii) Issue of Equity share for the purchase of plant and Machinery worth ₹10,00,000-Decrease

Reason: This transaction will increase the amount of Shareholders Fund by ₹10,00,000 in the form of equity shares and have no effect on Long-term Loans.

Debt equity ratio= Long-term Debt /equity=20,00,000/20,00,000=1:1

 

(iii)Issue of preference Shares for redemption of 13% Debentures worth ₹10,00,000-Decrease

Reason: This transaction will lead to decrease in Long-term Loan by ₹10,00,000 in the form of redemption of debentures and increase in Shareholders’ Funds with the same amount in the form of Preference Shares.

Debt equity ratio= Long-term Debt /equity=20,00,000-10,00,000/10,00,000+10,00,000=5:1