Question : The debt-to-equity ratio of a company is 1: 2. State whether the 'Issue of bonus shares' will increase, decrease or not change the Debt to Equity Ratio.
Option 1: Increase
Option 2: Decrease
Option 3: No change
Option 4: can't say
Correct Answer: No change
Solution :
Answer =
No change
Neither the Total long-term debt nor the shareholder fund is affected. Since it is a Conversion of Accumulated Profit into share capital. The issuance of bonus shares will not change the Debt to Equity Ratio. Bonus shares are distributed from the company's reserves, not affecting its debt or equity. Therefore, the ratio remains unchanged, as neither the debt nor the equity is altered.
Hence, the correct option is 3.
