Interpretation of financial statements

HHoney9y ago

Hi sir, Please explain me about this question Q In the SOFP of a firm, the debt equity ratio is 2:1. If the amount of long term sources is 12 million, what is the amount of equity of the firm? Correct answer is $4 million! But my ans is $6 million by LTdebt/equity=2/1 2 equity=12m Equity=6m

John MoffatTutor9y ago#1

Long-term capital is the total of equity and debt. If debt:equity is 2:1, then it means that debt is 2/3 of the total and equity is 1/3 of the total. So if the total is 12M, then debt will be 8M and equity will be 4M.

HHoney9y ago#2

Thanks sir* I am now clear :)

John MoffatTutor9y ago#3

You are welcome :-)

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