Gearing

Question 1

what are the issues assisated with a high level of gearing?

Answer 1

1. volatile returns for shareholders
2. in a downturn economically, this could result in a struggle to repay all debt on which they relied heavily on
3. in the case of a firm agreeing to variable interest rate, it could mean that firm struggles to pay back debt along with corresponding interest

Question 2

What is the traditional view on gearing

Answer 2

benfits of financial gearing are limited
diminishing affect past the optimal point
optimal point =
LOW cost of capital
HIGH shareholder wealth

Question 3

what is the trade-off theory relating to financial gearing

Answer 3

Keep a balanced and sustainable level of gearing

aviod going bust whilst also benefitting from tax relief

Question 4

What is gearing?

Answer 4

Gearing refers to the level of a company’s debt related to its equity capital,

measure of a company’s financial leverage and shows the extent to which its operations are funded by lenders versus shareholders.