Ratios For Loan Purpose

Accounts and Finance
Step 7 Ratio Analysis

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

Calculate Debt Equity Ratio assuming Unsecured Loans as Equity

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