Debt Gearing and Liquidity Ratios Flashcards
Learn the ratios relating to calculation of debt
1
Q
Financial Gearing Ratio
A
Debt / Equity+Debt x100
Debt/ Equity x100 is also used
2
Q
At what ratio does a company become high geared
A
Above 50%
3
Q
Interest Cover
A
Profit from Operations / finance cost
4
Q
What does interest cover show
A
The ability of the company to pay interest on debt.
5
Q
How do you calculate the cost of redeemable debt?
A
Internal rate of return
Cost of Capital that yielded a positive NPV +
((Positive NPV/ negative NPV+positive NPV) X change between cost of Capital)
6
Q
How do you calculate irredeemable debt?
A
Interest Costs X (1 - tax rate) / Market Value of Debt
7
Q
What is iredeemable debt
A
Debt that will never be repaid and can be traded eg debentures. Interest only.
