Question

Assuming that the Debt-Equity Ratio of a company is 2 : 1, state whether this ratio would increase, decrease or not change in the following cases:

1. Issue of new shares for cash.
2.  Repayment of a long-term bank loan.

Answer 1

1. The debt-equity ratio will decrease because equity increases while debt remains the same.
2. The debt-equity ratio will decrease because debt is reduced while equity remains unchanged.