Question
A company with paid-up equity capital of ₹20,00,000
and free reserves of ₹30,00,000 decides to buy back shares worth ₹15,00,000. The debt-equity ratio post buy-back must not exceed 2:1. If the company has existing debt of ₹70,00,000, can the buy-back be executed?Solution
Net Worth before buy-back = ₹20L + ₹30L = ₹50L • Maximum buy-back allowed = ₹12.5L (25% of net worth) • Debt after buy-back = ₹70L • Net Worth after ₹15L buy-back = ₹35L → Debt-equity ratio = 70L / 35L = 2:1 But ₹15L exceeds the buy-back ceiling, so only ₹12.5L is permissible
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