Practicing Success
There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below. Assertion (A): Debt to Equity Ratio shows the relationship between Debt and Shareholders' Funds and indicates the long-term financial soundness of the enterprise. |
Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A). Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion (A ). Assertion (A) is not correct but the Reason (R) is correct. Only Assertion (A) is correct. |
Both, Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A). |
Debt-Equity Ratio measures the relationship between long-term debt and equity. If debt component of the total long-term funds employed is small, outsiders feel more secure. From security point of view, capital structure with less debt and more equity is considered favourable as it reduces the chances of bankruptcy. Normally, it is considered to be safe if debt equity ratio is 2 : 1. However, it may vary from industry to industry. It is computed as follows: Debt-Equity Ratio = Long − term Debts Shareholders’ Funds. |