Question

The debt-equity ratio of a company is 0.8 : 1. State whether the long-term loan obtained by the company will increase, decrease or not change the ratio.

Answer 1

If a company takes a long-term loan, the debt-equity ratio increases. The debt-equity ratio is calculated by dividing the company’s total debt by its shareholders equity. When a company faces more long-term debt, the total debt increases while the shareholders equity remains unchanged.