Which transaction can make a decrease in the Debt-Equity Ratio and an…

The correct answer is option 4- Issue of Equity shares for cash.

Debt-Equity Ratio = Long − term Debts/ Shareholders’ Funds
Current ratio = Current assets/Current liabilities

Issue of Equity shares for cash- Issue of Equity shares increases equity in debt-equity ratio which makes it decrease because debt-equity formula is debt/equity, only equity is increased which makes this ratio to decrease.
Cash increases in current assets on the issue of shares which makes the current ratio increase because only current assets is increased, no effect on current liabilities.

 

OTHER OPTIONS

• Issue of Debentures against the purchase of fixed assets- It makes an increase in debt only. There is no change in current assets, current liability and equity. It makes no change in current ratio and increase in debt-equity ratio.

• Issue of Debentures for cash- It makes an increase in debt. There is also an increase in current assets. So, it increase current ratio and increase in debt-equity ratio.

• Redemption of Preference shares for cash- It makes a decrease in equity. There is also a decrease in current assets. So, it decrease current ratio and increase in debt-equity ratio.