Question

The Debt Equity Ratio of Manak Enterprises is 2.5 : 1. Which of the following transactions will result in an increase in this ratio?

Options

• Purchase of goods on credit ₹ 2,00,000.

• Payment to creditors ₹ 3,00,000.

• Issue of debentures ₹ 6,00,000.

• Sale of furniture of the book value of ₹ 4,00,000 at a profit of 10%.

Answer 1

Issue of debentures ₹ 6,00,000.

Explanation:

Financial leverage is evaluated with the help of the debt–equity (D/E) ratio. It is calculated by dividing a company’s total liabilities by its shareholders’ equity. The D/E ratio is an important measure in corporate finance as it shows the extent to which a business relies on debt instead of internal funds to finance its operations.