Question : Equity share Capital Rs.20,00,000; Reserves Rs.5,00,000; Debenture Rs.10,00,000; Current liabilities Rs.8,00,000. Debt equity ratio will be -
Option 1: 0.32:1
Option 2: 0.40:1
Option 3: 0.72:1
Option 4: 0.50:1
Correct Answer: 0.40:1
Solution : The debt-to-equity ratio is calculated by dividing a company's total liabilities by the sum of its shareholders' equity. For the majority of businesses and industries, a desirable debt-to-equity ratio is around 2.0.
Hence the debt equity ratio is -
Debentures / (Equity share capital + Reserves)
1000000 / (2000000 + 500000)
0.40:1
Hence the correct answer is option 2.
Note :- Current liability is not included in debt for the purpose of Debt-equity ratio, since only Long term debt is taken to calculate this ratio.
