Question

The debt to equity ratio of a Company is 1:2. State giving reasons the effect (would...

  1. The debt to equity ratio of a Company is 1:2. State giving reasons the effect (would improve, deteriorate or not alter) of the following on the debt to equity ratio.
  1. Redemption of bonds
  2. Issue of equity shares
  3. Purchase of the merchandise on credit
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Answer #1
Redemption of bonds improve
Redemption of bonds means company will payback principal to bondholders and it would reduce the company debt. Hence the debt to equity ratio would decrease. Decreased Debt to equity is positive sign for company financial position hence we say debt equity improved
Issue of equity shares improve
Issue of new equity shares will increase shareholder equity. Due to increase shareholder equity debt to equity ratio will decrease in other words it will improve
Purchase of the merchandise on credit not alter
Purchase of the merchandise on credit will not have any effect on debt to equity ratio as creditors are neither part of debt nor part of equity.
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