Question

Debt Equity Ratio of JP Ltd. is 1.8 : 1.

Mention whether this ratio will improve/reduce/not change after the issue of 5,000, 6% Debentures of ₹ 100 each.

Answer 1

Issuing 5,000, 6% Debentures of ₹ 100 each increases the total long-term debt by ₹ 5,00,000.

When the numerator (Debt) increases, and the denominator (Equity) remains constant, the overall value of the ratio increases. In accounting terminology for this specific context, an increase in the numerical value of the ratio is referred to as an Improvement.