Accounts and finance

Table of Contents

1. Topic pack - Accounts and finance - introduction
2. 3.1 Sources of finance - notes
3. 3.1 Sources of finance - questions
4. 3.2 Investment appraisal - notes
5. Investment appraisal
6. 3.2 Investment appraisal - questions
7. 3.3 Working capital - notes
8. 3.3 Working capital - questions
9. 3.4 Budgeting - notes (HL only)
10. 3.4 Budgeting - questions
11. 3.5 Final accounts - notes
12. 3.5 Final accounts - questions
13. 3.5 Final accounts - simulations and activities
14. 3.6 Ratio analysis - notes
15. 3.6 Ratio analysis - questions
16. 3.6 Ratio analysis - simulations and activities
    1. DragIT - Profitability ratios
    2. DragIT - Build the profitability ratios
    3. DragIT - Liquidity ratios
    4. DragIT - Build the liquidity ratios
    5. DragIT - Balance sheet
    6. DragIT - Efficiency ratios
    7. DragIT - Build the financial efficiency ratios
    8. DragIT - Build the shareholder ratios
    9. DragIT - Gearing ratio
    10. DragIT - Build the gearing ratio
    11. DragIT - Ratio analysis
17. Printable version

DragIT - Gearing ratio

In the image below, try clicking on the arrows beside each variable to see the impact of changes on the gearing ratio. Once you have done that, you may like to have a go at the questions below.

1

Loan capital changes - gearing When loan capital increases the value of the gearing ratio will fall. a) True b) False Yes, that's correct. The statement is false. When loan capital increases the top half of the gearing ratio (loan capital divided by capital employed) will increase. This will increase the value of the gearing ratio.No, that's not right. The statement is false. When loan capital increases the top half of the gearing ratio (loan capital divided by capital employed) will increase. This will increase the value of the gearing ratio.Your answer has been saved.

2

Gearing ratio value A high gearing ratio is good for a firm as it will ensure they have funds for expansion. a) True b) False Yes, that's correct. The statement is false. A high gearing ratio means a high proportion of loan capital in the financing of the firm. This may help them expand, but is not necessary for expansion. Indeed it may be a disadvantage as the firm may be very exposed to changes in interest rates.No, that's not right. The statement is false. A high gearing ratio means a high proportion of loan capital in the financing of the firm. This may help them expand, but is not necessary for expansion. Indeed it may be a disadvantage as the firm may be very exposed to changes in interest rates.Your answer has been saved.

3

Sources of finance and gearing Which of the following sources of finance will increase the gearing ratio? a) A long-term bank loan b) Debt factoring c) A rights issue d) The issue of debentures e) Sale and leaseback a) Yes, that's correct. A long-term bank loan will increase borrowing and therefore increase the gearing ratio.a) No, that's not right. A long-term bank loan will increase borrowing and therefore increase the gearing ratio.b) Yes, that's correct. Debt factoring will have no impact on the gearing ratio as it is simply recovering money early from debtors.b) No, that's not right. Debt factoring will have no impact on the gearing ratio as it is simply recovering money early from debtors.c) Yes, that's correct. A rights issue will affect the gearing ratio, but it will reduce it as it will increase capital employed (the bottom half of the ratio) but not borrowing (the top half).c) No, that's not right. A rights issue will affect the gearing ratio, but it will reduce it as it will increase capital employed (the bottom half of the ratio) but not borrowing (the top half).d) Yes, that's correct. Debentures are a form of borrowing and so will increase the gearing ratio.d) No, that's not right. Debentures are a form of borrowing and so will increase the gearing ratio.e) Yes, that's correct. Sale and leaseback will have no impact on the gearing ratio.e) No, that's not right. Sale and leaseback will have no impact on the gearing ratio.

4

Sources of finance and gearing Which of the following sources of finance will reduce the gearing ratio? a) Sale of shares b) Leasing c) Increased retained profit being reinvested d) A long-term bank loan e) A rights issue f) Debt factoring a) Yes, that's correct. The sale of shares will increase share capital and therefore capital employed (the bottom half of the gearing ratio) but will have no effect on borrowing (the top half). The gearing ratio will therefore fall.a) No, that's not right. The sale of shares will increase share capital and therefore capital employed (the bottom half of the gearing ratio) but will have no effect on borrowing (the top half). The gearing ratio will therefore fall.b) Yes, that's correct. Leasing will have no effect at all on the gearing ratio.b) No, that's not right. Leasing will have no effect at all on the gearing ratio.c) Yes, that's correct. Higher retained profit will mean higher capital employed (the bottom half of the gearing ratio) but will have no effect on borrowing (the top half). The gearing ratio will therefore fall.c) No, that's not right. Higher retained profit will mean higher capital employed (the bottom half of the gearing ratio) but will have no effect on borrowing (the top half). The gearing ratio will therefore fall.d) Yes, that's correct. A long-term bank loan will increase loan capital and therefore increase the gearing ratio.d) No, that's not right. A long-term bank loan will increase loan capital and therefore increase the gearing ratio.e) Yes, that's correct. A rights issue will increase share capital and therefore capital employed (the bottom half of the gearing ratio) but will have no effect on borrowing (the top half). The gearing ratio will therefore fall.e) No, that's not right. Yes, that's correct. A rights issue will increase share capital and therefore capital employed (the bottom half of the gearing ratio) but will have no effect on borrowing (the top half). The gearing ratio will therefore fall.f) Yes, that's correct. Debt factoring will have no effect at all on the gearing ratio.f) No, that's not right. Debt factoring will have no effect at all on the gearing ratio.