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    Question

    The Debt Equity ratio of a company is 0.4. Which of the following will change the Debt Equity Ratio?

    A Cash received from debtors Correct Answer Incorrect Answer
    B Sales of goods on cash basis Correct Answer Incorrect Answer
    C Redemption of debentures Correct Answer Incorrect Answer
    D Purchase of goods on credit Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    Cash received from debtors will leave the internal and external funds unchanged as this will only affect the composition of current assets. Hence, the debt-equity ratio will remain unchanged. Sale of goods on cash basis neither affects Debt nor equity. Purchase of goods on credit neither affects Debt nor equity. Redemption of debentures decrease the long-term debt thus the debt equity ratio will be lower than 0.4

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