lesson 9

Question 1

high gearing (8

Answer 1

-high amount of capital financed through debt
-increased cash outflows for loan capital repayments
-and interest repayments
-reducing cash reserves
-reduced current assets
-low current ratio
-poor liquidity
-difficulty meeting current liabilities such as payables, when due

Question 2

low gearing (9)

Answer 2

-lower amount of capital financed through debt
-reduced cash outflows for loan capital repayments
-less interest to be paid compared to high gearing
-ensuring no additional strain placed on cash reserves
-increased current assets
-high current ratio
-good liquidity
-able to meet current liabilities such as payables, when due
-no risk of having to sell non-current asset to use as cash

Question 3

high ROCE (8)

Answer 3

-the business has higher ROCE
-the business is making efficient use of its capital to generate profit
-high profitability
-higher return on investment for shareholders
-increase in dividend payments
-business becomes more attractive to shareholders
-higher share price
-able to raise more capital through selling shares in the future

Question 4

low ROCE (8)

Answer 4

-The business has a low ROCE
-not making efficient use of its capital to generate profit
-low profitability
-lower return on investment for shareholders
-may be unable to pay high dividends
-business is less attractive to shareholders
-higher share price
-unable to raise much capital through selling shares