question_answer

The debt to equity ratio of Rattle Ltd is 2 : 1. State giving reasons, whether this ratio will increase or decrease or will have no change in each of the following cases:

(i) Declaration of final dividend.

(ii) Issue of new shares for cash.

(iii) Conversion of debentures into equity shares

(iv) Redemption of debentures for cash.

Identify the value shown by Rattle Ltd in declaration of final dividend.

Answer:

Transaction	Effect on debt equity ratio	Reasons
(i)	Increase	Total shareholders' funds are decreased by the amount of profits appropriated for dividend but long-term debts remain unchanged. Upon the declaration of dividend by the company, the profits to the extent of dividend declared become a current debt and hence shareholders' funds are decreased and current liabilities are increased by the amount of dividend declared.
(ii)	Decrease	This would decrease the ratio as the shareholders' fund would increase to the extent of capital issued without a subsequent change in long-term loan.
(iii)	Decrease	The long-term debt will decrease and shareholders' fund will increase.
(iv)	Decrease	Total long-term debts are decreased, but total shareholders' funds remain unchanged.

Value shown by Rattle Ltd is: Respect for Law By declaring dividend on profits, Rattle Ltd. has showed the respect for law.