Question

The Debt-Equity Ratio of X Ltd. is 1 : 2. What is the effect of conversion of debentures into preference shares on this ratio?

Answer 1

The conversion of debentures into preference shares will decrease the debt-equity ratio of X Ltd. because the conversion reduces debt and increases equity by the same amount. The debt-equity ratio is at 1 : 2, signifying two equity for every debt. When debt debentures are converted into equity preference shares, total debt decreases and shareholders’ equity increases. As a result, the proportion of debt to equity is reduced, leading to a lower debt-equity ratio.