XYZ Ltd. has long‑term debt of Rs.80,000 and shareholders' equity of Rs.2,00,000. Calculate the debt‑equity ratio and state what the ratio indicates about the company's financing pattern.
Answer
Debt‑Equity Ratio = 0.4
The correct answer is Debt‑Equity Ratio = 0.4 — Thus the debt‑equity ratio is 0.4.
Step-by-step solution
- Write the formula: Debt‑Equity Ratio = Long‑term Debt ÷ Shareholders' Equity.
- Insert the values: = 80,000 ÷ 2,00,000.
- Simplify the fraction: 80,000 ÷ 2,00,000 = 0.4.
- Interpretation: For every rupee of equity, the company has Rs.0.40 of debt, indicating a lower reliance on borrowed funds.
- Thus the debt‑equity ratio is 0.4.
Common mistake: Using total assets instead of shareholders' equity in the denominator
Concept tested: Debt‑Equity Ratio (Solvency Ratio)
Published · How this solution was prepared and checked
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