Login

x limited has a debt equity ratio of 3 : 1. acording to management it should be maintained at 1 : 1. what are the 2 choices to do so ?

X limited has a debt-equity ratio of 3 : 1. We know the Debt-Equity ratio is a ratio of Debts and Equity. In order to make it 1 : 1, the company has three alternatives given below.

(i) Reduce its Debts to 1/3rd times

(ii) Increase its Equity to 3 times or

(iii) Combination of both i.e. reduce Debts and increase Equity by the equal proportion.

 

Suppose a company has total debts of Rs 30,000 and equity of Rs 10,000 so, clearly Debt-Equity Ratio is 3 : 1.

To make this ratio as 1: 1, the company can opt for any one of the following alternatives.

(i) Reduce Debts to 1/3rd times

Equity = 10,000

(ii) Increase Equity to 3 times

Debts = 30,000

(iii) Reduce Debts and increase Equity by equal proportion.

Let Debts are reduced and Equity are increased by the same amount of 10,000

New Debts = 30,000 – 10,000 = 20,000

New Equity = 10,000 + 10,000 =20,000

  • 12
View Full Answer

Debt-Equity Ratio = 3:1

To make this ratio equal to 1:1, two of the many availabe options:

(i) increase equity to 3 times

(ii) decrease debt to 1/3 rd

.

Practically, convert 1/3 rd of the debt capital into equity capital.

In this way, the proportion of the debt to equity would become

= (3X-X):(X+X)

= 2X:2X

= 1:1

  • 1

LETS TAKE THE EXAMPLE:

DEBT EQUITY RATIO = LONG TERM DEBT / EQUITY

  3/1  = 300000/100000

 TO MAKE IT 1:1

  1/1 = 300000-200000 / 100000 : ( IE PAYING OFF DEBT OF RS 200000, THIS WILL REDUCE DEBT BUT NOT EQUITY)

ii ALTERNATIVE

1/1 = 300000 / 200000+100000: (ie BY ISSUING EQUITY SHARE OR INCREASING RESERVES BY RS 100000)

  • -2
What are you looking for?