Question:
The Debt-Equity Ratio of a company is 3 : 2. Which of the following transactions will result in an increase in this ratio?
The Debt-Equity Ratio of a company is 3 : 2. Which of the following transactions will result in an increase in this ratio?
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Issuance of debt (like debentures) increases the numerator of the debt-equity ratio, while equity-related transactions impact the denominator.
Updated On: Jan 13, 2026
- Purchase of goods on credit
- Issue of Debentures
- Issue of Equity Shares
- Cash received from Debtors
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The Correct Option is B
Solution and Explanation
- The debt-equity ratio is calculated as:
\[
\text{Debt-Equity Ratio} = \frac{\text{Total Debt}}{\text{Total Equity}}.
\]
- Issuing debentures increases debt without affecting equity, resulting in an increase in the debt-equity ratio.
- Other transactions like issuing equity shares or receiving cash from debtors affect equity or current assets, not the debt-equity ratio.
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