UNIT 7 GEARING RATIO

Question 1

What does grearing look at

Answer 1

Looks at structure of capital within a bs

Question 2

define gearing ratio

Answer 2

How much of a bs capital employed is made up of non current liabilities

Question 3

give examples of NCL

Answer 3

loans, mortgages , bonds, debentures

Question 4

Equation for Gearing Ratio

Answer 4

NCL/CAPITAL EMPLOYED x 100

Question 5

how do we work out capital employed

Answer 5

Total Equity + NCL

Question 6

how do we work out tota equity

Answer 6

retained profit + share capital

Question 7

where do we find components for equation

Answer 7

balance sheet

Question 8

A higher % Gearing means youre more

Answer 8

leveraged as a bs

Question 9

the more leveraged you are as a bs the more sensitive you are to

Answer 9

interest rate inreases

Question 10

as loans , mortgages and debentures have an IR attached what happends when you take out a NCL

Answer 10

Renting moeny

Question 11

if IR goes up and a bs is hghly geared wahr does this simply mean

Answer 11

costs of bs have gone up

Question 12

what is important about debt

Answer 12

vital component to expanding abs

Question 13

its iportnat we expand our bs through share capital but not only share capita why ?

Answer 13

wanna keep SH happy - as they’ll question why bs majorly reliant on share capital

Question 14

A gearing ratio of 50% or more means

Answer 14

highly gared bs

Question 15

when is a highly geared bs at risk

and why

Answer 15

if IR increase or

have low/consistent profit

can lead to liquidity issue

Question 16

what does it mean if you have a geairng ratio of 25% or less

and so you are

Answer 16

low gearing ratio , so safe from liquidity POV

Question 17

what is an accpetbale gearing ratio

Answer 17

25-50%

Question 18

where youa re withn the accpetbalegearing ratio range depends on

Answer 18

IR

Question 19

explain 2009-2020 in terms of IR and gearing

Answer 19

low IR

so bs within thistime period tend to be at a higher level within the range

Question 20

explain 2021 in terms of intterst rate and acceptable gearing ratio range

Answer 20

IR started to increase

so makes sense for bs to be at lower lvl within acceptable gearing rang

e .g from high 40s to 30s

Question 21

when is a higer gearig ratio approprtioate

Answer 21

Low IR

Consistent high profits - to hae some retained profit to fall back on if IR increase

wanna keep control bs and avoid using shares as a method of expansion

Question 22

when is low gearing ratio mroe approprtiqate

Answer 22

in high IR enviro as makes you more secure form liquidity pov

Low inconsistent profits - got no retianed profits to fallback on if IR increase

If happy to expand sh base ad have few concerns about losing control and DM

Question 23

HOW TO REDUCE GEARING RATIO IF HIGH pt 1

Answer 23

Reduce NCL through using cash to pay down NCL

Question 24

when reducing gearing ratio by using cash to pay down NCL what do we need to look at and why

Answer 24

current ratio in that time

as cash lvl reduces and therefore current liabilities
could give you liquid issue

Question 25

HOW TO REDUCE GEARING RATIO IF HIGH pt 2

Answer 25

Increasing SC as part of total equity

Question 26

explan reducing gearing through increasing SC

Answer 26

part of TE

therefore part of capital employed so if increase it youre gearing ratio will reduce

Question 27

What do we need to consider when reducing gearing thorug Share capital

Answer 27

may mean giving up control through taking up more SH through Share capita