Rho Ltd. is financed entirely by equity of Rs. 60 lakh. It now raises a long-term loan of Rs. 20 lakh. What is its debt-equity ratio after the loan?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → 1 : 3
Given:
Equity (owners’ funds) = Rs. 60 lakh
Debt (long-term loan) = Rs. 20 lakh
Debt-equity ratio = Debt ÷ Equity
Debt-equity ratio = 20 ÷ 60 = 1 : 3
Option (1) 1 : 4 — Incorrect. This is debt ÷ (debt + equity) = 20 ÷ 80. It is the proportion of debt in total capital.
Option (2) 3 : 1 — Incorrect. This is equity ÷ debt = 60 ÷ 20, the ratio turned upside down.
Option (3) 1 : 3 — Correct. Debt over equity is 20 ÷ 60, which is 1 : 3.
Option (4) 3 : 4 — Incorrect. This is equity ÷ total capital = 60 ÷ 80.
NCERT (2026-27 Edition): Capital Structure
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