Question : State one transaction which results in a decrease in the 'Debt-Equity Ratio' and no change in the 'Current Ratio'
Option 1: Redemption of debentures in cash
Option 2: Redemption of debentures by cheque
Option 3: Paid cash to trade payable
Option 4: Conversion of debentures into shares
Correct Answer: Conversion of debentures into shares
Solution :
Answer =
conversion of debentures into shares
Debentures redeemed are part of current liabilities as for Schedule III. On the other hand, shareholder funds are increased. As a result, the numerator does not change, and the denominator increases, debt-to-equity ratio will decrease. This is because the conversion reduces long-term debt (debt) while increasing shareholders' equity (equity), affecting the debt-to-equity ratio but not the current assets or liabilities. So, the current ratio will not change.
Hence, the correct option is 4.
