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    Question

    PQR Ltd has the following information. Accounts Analyst

    has been asked to submit the report of the basis of given information                                                                   2020-21                    2019-20            2018-19 Total Debt (Rs)        500000                      450000             370000 Total Equity(Rs)       800000                     870000             900000 What will the Analyst conclude in his/her report?
    A The company is becoming less solvent as evidenced by the increase in its debt-to-equity ratio from 0.411 to 0.625 from 2018-19 to 2020-21 Correct Answer Incorrect Answer
    B The company is becoming less liquid as evidenced by the increase in its debt-to-equity ratio from 0.411 to 0.625 from 2018-19 to 2020-21 Correct Answer Incorrect Answer
    C The company is becoming less profitable as evidenced by the increase in its debt-to-equity ratio from 0.411 to 0.625 from 2018-19 to 2020-21 Correct Answer Incorrect Answer
    D The company is becoming more solvent as evidenced by the increase in its debt-to-equity ratio from 0.411 to 0.625 from 2018-19 to 2020-21 Correct Answer Incorrect Answer
    E Nothing can be inferred from the above information Correct Answer Incorrect Answer

    Solution

    Debt to equity ratio signifies the solvency of a firm. If debt to equity increases it puts a company in a difficult situation as interest on debt is a mandatory payment which has to be paid irrespective of the profits made. Therefore, this ratio determines the solvency position of a firm. If it increases, it makes the firm less solvent.

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