A* evaluation

Question 1

Why is gearing an important measure for a business?,

Answer 1

a business with high gearing may be more susceptable to increases in interest rates.

Fixed costs still need to be payed even when sales fall.

However, increasing borrowing can allow a business to invest in activities that enable a business to increase profits and improve shareholder value

Question 2

What is the acceptable level of gearing?

Answer 2

very much depends on the business.

A maturee and estabilished business with reliable and strong cash flows, can handle much higher level of gearing

than a business where cash flow is uncertain and unpredictable

Question 3

Evaluate decison trees

Answer 3

Decison trees provide a logical and quantitative approach to decison making, allowing managers to consider all the options and outcomes of a decision.

However, the usefullness of decision trees largely depends on the accuracy of not only the estimated costs and returns, but also the probability of each outcome

Managers should also consider other factors such as qualitive info before making a decision