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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
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.
I am now clear 🙂
You are welcome 🙂