Question

______ will decrease Debt-Equity Ratio and will not change Current Ratio.

Options

• Issue of equity shares for cash.

• Issue of preference shares for cash.

• Redemption of debentures.

• Issue of shares for the purchase of land and building.

Answer 1

Issue of shares for the purchase of land and building.

Explanation:

The Debt-Equity Ratio compares long-term debt to shareholders’ equity, while the Current Ratio compares current assets to current liabilities. Issuing shares to buy land and buildings increases shareholders’ equity (the denominator of the Debt-Equity Ratio) without changing long-term borrowings, causing the Debt-Equity Ratio to decrease. Simultaneously, because both shares and fixed assets are non-current items, no cash or short-term accounts are affected, keeping the Current Ratio completely unchanged.