ABC Ltd., a telecom company was passing through a bad phase of business cycle and banks were unwilling to lend further amount. It decided to do introspection and compiled following information for the purposes of analysis:
| PARTICULARS | AMOUNT (₹) |
| Total debts | 900000 |
| Preference share capital | 100000 |
| Shareholders funds | 200000 |
| Current liabilities | 400000 |
| Purchases | 90000 |
| Excess of opening inventory over closing inventory | 10000 |
| Aggregate of opening and closing inventory | 50000 |
Calculate debt to equity ratio.
Answer & explanation
Correct answer: option 3
Debt-Equity Ratio = Long−term Debts/ Shareholders’ Funds
= 500000 / 200000
= 2.5:1
*Long-term debt = Total debt - current liabilities
= 900000 - 400000
= ₹500000