On the basis of the following information, answer the question.
| Particulars | Amount (₹) |
| Share Capital: | |
| Equity share capital (₹10 each) | 12,00,000 |
| 12% Preference share capital | 3,00,000 |
| Reserves & Surplus | 5,00,000 |
| 10% Debentures | 12,00,000 |
| Current Liabilities | 3,00,000 |
| Fixed Assets | 28,00,000 |
| Current Assets | 7,00,000 |
| Net profit after tax as per Statement of Profit & Loss | 450000 |
| Tax | 150000 |
| Market Price of the Share | 34 |
Debt-Equity ratio is a measure of:
Answer & explanation
Correct answer: option 4
The correct answer is option 4- Solvency of business.
Debt-Equity ratio is a measure of Solvency of business.
Solvency ratios are calculated to determine the ability of the business to service its debt in the long run. Debt-equity ratio is one among them. 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