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    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?
    A Higher than 2:1 Correct Answer Incorrect Answer
    B Lower than 2:1 Correct Answer Incorrect Answer
    C Remains 2:1 Correct Answer Incorrect Answer
    D Cannot be determined Correct Answer Incorrect Answer
    E Becomes 1:1 Correct Answer Incorrect Answer

    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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