CS Executive · Corporate Accounting and Financial Management · Capital Structure
Aarav Ltd has equity share capital of ₹6,00,000, reserves of ₹2,00,000, 10% preference share capital of ₹2,00,000 and 12% debentures of ₹4,00,000. Treating reserves as part of equity, what is the debt-equity ratio (debt = debentures only; equity = equity shareholders' funds)?
The debt-equity ratio is 0.50. Equity shareholders' funds are ₹6,00,000 share capital plus ₹2,00,000 reserves, which is ₹8,00,000, and debt is ₹4,00,000 of debentures. Dividing 4,00,000 by 8,00,000 gives 0.50. Excluding reserves would wrongly give 0.67.
- A0.50Correct
- B0.67
- C0.40
- D1.50
Explanation
Equity shareholders' funds = 6,00,000 + 2,00,000 = ₹8,00,000. Debt = ₹4,00,000. Ratio = 4,00,000/8,00,000 = 0.50. Using only share capital gives 0.67, which wrongly ignores reserves.
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