Question

    The Debt Equity ratio of a company is 1.6. Which of the

    following events is likely to improve the debt equity ratio of the company?
    A Reduction in debtors outstanding Correct Answer Incorrect Answer
    B New sales of goods on cash basis only Correct Answer Incorrect Answer
    C Rights issue by the company Correct Answer Incorrect Answer
    D Decline in the working capital limit utilisation Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    A Rights issue means that the company raises new equity capital from its existing shareholders. As such, the overall equity will increase leading to an improvement in the debt equity ratio of the company. Reduction in debtors will leave the internal and external funds unchanged as this will only affect the composition of current assets. Hence, the debt-equity ratio will remain unchanged. Sale of goods on cash basis neither affects Debt nor equity. Working capital debt is a short term debt and not included in the debt equity ratio as this ratio considers only long term debt. As such, a decline in working capital limit utilisation will not impact the debt equity ratio.

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