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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

A company has equity share capital ₹5,00,000, reserves and surplus ₹3,00,000, 10% long-term debentures ₹4,00,000 and long-term bank loan ₹2,00,000. Using the debt-equity ratio as long-term debt divided by shareholders' funds, what is the ratio?

The debt-equity ratio is 0.75:1. Long-term debt of ₹6,00,000 (debentures plus bank loan) is divided by shareholders' funds of ₹8,00,000 (share capital plus reserves). Counting only debentures would wrongly give 0.50.

  1. A0.75:1Correct
  2. B0.50:1
  3. C1.20:1
  4. D0.60:1

Explanation

Shareholders' funds = 5,00,000 + 3,00,000 = 8,00,000. Long-term debt = 4,00,000 + 2,00,000 = 6,00,000. Ratio = 6/8 = 0.75:1. The 0.50 figure counts only debentures; 0.60 uses a wrong base of 10,00,000 being total of equity share capital and debt.

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