Question

Assuming that the debt-equity ratio is 2 : 1, state giving reasons, which of the following transactions would (i) increase (ii) decrease (iii) not alter the debt-equity ratio:

1. Issue of Preference Shares.
2. Buy-back of its own shares by a Company.
3. Issue of debentures.
4. Repayment of Bank Loan.
5. Sale of a non-current asset at par.
6. Sale of a non-current asset at profit.
7. Sale of a non-current asset at loss.
8. Purchase of a non-current asset on a credit of 3 months.
9. Purchase of a non-current asset on long-term deferred payment basis.

Answer 1

Tr. No.	Debt-Equity Ratio will	Reason
i.	Decrease	Long-term debt is unchanged, but equity shareholders’ funds are strengthened by the cash received on preference share issuance.
ii.	Increase	Long-term loans are unchanged, but equity (shareholders’ funds) is down.
iii.	Increase	Long-term debts are raised, but equity (shareholders’ fund) is not.
iv.	Decrease	Long-term obligations are reduced, but equity (shareholders’ funds) is not affected.
v.	Not Alter	Long-term obligations and equity (shareholders’ fund) are also unaffected.
vi.	Decrease	Long-term debts remained unchanged, but equity (shareholders’ fund) dropped by the same amount.
vii.	Increase	Long-term debts remained unchanged, but equity (shareholders’ fund) dropped by the same amount.
viii.	Not Alter	Long-term obligations and equity (shareholders’ fund) are also unaffected.
ix.	Increase	Long-term debts are raised, but equity (shareholders’ fund) is unaffected by the purchase price.