Question
A company has a Debt-to-Equity ratio of 2:1. It
purchases a new plant for ₹5,00,000, financing it entirely by taking a long-term loan. What will be the new Debt-to-Equity ratio?Solution
Initially, D/E = 2/1. The transaction increases Debt (Loan) by ₹5,00,000 but does not change Equity. Therefore, Debt increases while Equity stays the same, making the ratio (D+5,00,000)/E, which is higher than the original 2/1.
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