The debt equity ratio of a company is 1:2. Which of the following would increase, decrease or not change the ratio?
a) Purchased a fixed asset for Rs. 50,000 on long term deferred payment basis.
b) Declaration of final dividend.

Dear Student

$\mathrm{Debt}-\mathrm{Equity} \mathrm{Ratio} = \frac{\mathrm{Long}-\mathrm{term} \mathrm{Debt}}{\mathrm{Shareholders}\text{'} \mathrm{Funds}}$

(a) Purchase of Fixed Asset for Rs 50,000 on Long-term deferred payment basis

-> Debt-Equity Ratio will increase in this case. Since the fixed asset is obtained on long-term deferred payment basis, long-term creditors of the company will increase, as a result, long-term debts will also rise.
Hence, debt-equity ratio will increase.

(b) Declaration of Final Dividend

-> When a company declares final dividend, the amount of profits available with the company reduces and gets converted into current liabilities (as the dividends become payable). Therefore, the amount of Shareholders' Funds will decrease (with the reduction in profits) while long-term debts will remain unchanged.
Hence, debt-equity ratio will increase in this case.