Question

From the following information, calculate Debt to Equity Ratio:

	₹
20,000 Equity Shares of 10 each, fully paid	2,00,000
10,000; 9% Preference Shares of 10 each fully paid	1,00,000
General Reserve	90,000
Surplus, i.e., Balance in Statement of Profit & Loss	40,000
10% Debentures	1,50,000
Current Liabilities	1,00,000

Answer 1

\[\text{Debt to Equity Ratio} = \frac{\text{Debt}}{\text{Equity}}\]

Calculation of Debt (Long-term Debt):

Debt includes only long-term liabilities.

$$\text{Debt} = \text{10\% Debentures}$$

$${\text{Debt} = ₹ 1,50,000}$$

Calculation of Equity (Shareholders’ Funds):

Equity includes share capital and reserves and surplus.

$$\text{Equity} = \text{Equity Share Capital} + \text{Preference Share Capital} + \text{General Reserve} + \text{Surplus}$$

$$\text{Equity} = ₹ 2,00,000 + ₹ 1,00,000 + ₹ 90,000 + ₹ 40,000$$

$${\text{Equity} = ₹ 4,30,000}$$

Calculation of Debt to Equity Ratio:

$$\text{Debt to Equity Ratio} = \frac{1,50,000}{4,30,000}$$

$$\text{Debt to Equity Ratio} = \frac{15}{43} \approx 0.3488$$

Debt to Equity Ratio = 0.35 : 1