Debt Equity Ratio for Banks
We know that Debt Equity Ratio=
Debts/Equity
i.e.
Long Term Loan/ (Capital+Reserves)
QUESTION 1
Whether Unsecured loan taken from directors, friends. relatives and related companies Debt or Equity ?
-a-
Technically they are Debt ie. Loan
However while giving loans some banks consider it part of equity
Hence,Unsecured Loans lead to Lower Debt Equiy Ratio in this case
QUESTION 2
Following is Balance Sheet of Company
| Liability | Amount | Asset | Amount |
| Capital | 10000 | Fixed Assets | 100000 |
| Reserves | 20000 | Less | |
| Secured Loan | 80000 | Dep | 20000 |
| Unsecured Loan | 20000 | Net Amount | 80000 |
| Current Liabilities | Current Assets | ||
| Sundry Creditors | 30000 | Debtors | 60000 |
| Bank OD | 10000 | Cash and Bank | 30000 |
| Total | 170000 | Total | 170000 |
Calculate Debt Equity Ratio assuming Unsecured Loans as Debt
View AnswerDebt=80000+20000=100000
Equity=10000+20000=30000
Debt Equity Ratio=100000/30000=3.3
Calculate Debt Equity Ratio assuming Unsecured Loans as Equity
View AnswerDebt=80000
Equity=10000+30000+20000=60000
Debt Equity Ratio=80000/60000=1.33
-ea-
