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Debt ratio = Total liabilities to outsiders/Total assets

December 02, 2017 By: Meliza Category: 1st SEM

2]

Assets Fixed Asset 15,00,000
Current Asset 5,00,000

 

Liabilities Accounts payable 200000
Reserve And Surplus 100000
10% Debentures 300000
6% Preference Share Capital 300000
Equity Share Capital 1100000
  1. Calculate Debt-Ratio
  2. Calculate Debt-equity Ratio

Solution  :

  1. Debt ratio = Total liabilities to outsiders/Total assets

= (Debentures + trade creditors)/ (Fixed + current assets)

= (3,00,000 + 2,00,000) / (15,00,000 + 5,00,000)

= 5,00,000 / 20,00,000

= 1: 4

 

Interpretation: The ratio indicates that the firm has Rs.4 assets for every rupee of long-term liability. Hence the financial position is good.

 

  1. Debt –equity ratio = Outsiders’ funds/shareholders’ equity or

= (Debentures + Trade Creditors)

Eq Sh capital + Pref Sh cap + Reserves)

= (3,00,000 +2,00,000)

(11,00,000 + 3,00,000 +1,00,000)

= 5,00,000 / 15,00,000

= 1 : 3

Interpretation: the ratio indicates that the firm has Rs.3 equity for every rupee of long-term liability. Hence the financial position is good.

 

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