Debt equity ratio of a company is 1 : 2, and if we issue debentures for cash then it will increase the debt equity ratio. Debt equity ratio = Debt/ Equity, as this ratio is 1:2 so lets assume debt is ₹100000 and equity is ₹200000. Issue of new shares for cash- Shares issue increase cash and equity. equity increased makes the ratio to decrease. Redemption of Debentures- Debentures redeem reduce debt. Issue of Debentures for cash- This transaction affect cash and debentures, Debentures included in debt. So lets assume debentures of 200000 issued means now debt is 300000 and equity is 200000. Debt equity ratio = 300000/200000 = 3:2. Means ratio increased. Goods purchased on credit- This transaction affect cash and stock. So, no affect on debt equity ratio.
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