Question

Monica Ltd. has a Quick Ratio of 1.5 : 1. Its Working Capital is ₹ 1,20,000, and its inventories are of ₹ 80,000. Total Assets of ₹ 3,80,000 and Total Debts of ₹ 2,80,000.

Calculate Debt to Equity Ratio.

Answer 1

Calculation of Equity (Shareholders’ Funds):

\[\text{Equity} = \text{Total Assets} - \text{Total Debts}\]

$$\text{Equity} = ₹ 3,80,000 - ₹ 2,80,000$$

$${\text{Equity} = ₹ 1,00,000}$$

Calculation of Current Liabilities:

We know that:

$$\text{Current Assets} - \text{Current Liabilities} = \text{Working Capital}$$

$$\text{Current Assets} = ₹ 1,20,000 + \text{Current Liabilities}$$

We also know that:

$$\text{Quick Assets} = \text{Current Assets} - \text{Inventories}$$

$$\text{Quick Assets} = (₹ 1,20,000 + \text{Current Liabilities}) - ₹ 80,000$$

$$\text{Quick Assets} = ₹ 40,000 + \text{Current Liabilities}$$

Using the Quick Ratio formula:

$$\text{Quick Ratio} = \frac{\text{Quick Assets}}{\text{Current Liabilities}}$$

$$1.5 = \frac{40,000 + \text{Current Liabilities}}{\text{Current Liabilities}}$$

$$1.5 \times \text{Current Liabilities} = 40,000 + \text{Current Liabilities}$$

$$0.5 \times \text{Current Liabilities} = 40,000$$

$$\text{Current Liabilities} = \frac{40,000}{0.5}$$

$${\text{Current Liabilities} = ₹ 80,000}$$

Calculation of Debt (Long-term Debt):

$$\text{Debt} = \text{Total Debts} - \text{Current Liabilities}$$

$$\text{Debt} = ₹ 2,80,000 - ₹ 80,000$$

$${\text{Debt} = ₹ 2,00,000}$$

Calculation of Debt to Equity Ratio:

$$\text{Debt to Equity Ratio} = \frac{\text{Debt}}{\text{Equity}}$$

$$\text{Debt to Equity Ratio} = \frac{2,00,000}{1,00,000} = 2$$

Debt to Equity Ratio = 2 : 1