ExpertMedium2 marksMultiple Choice
ACCA · Question 35 · Interpretation of financial statements
Which of the following would cause a company's gearing ratio (Debt / Equity) to increase?
Which of the following would cause a company's gearing ratio (Debt / Equity) to increase?
Answer options:
A.
Making a rights issue of shares
B.
Repaying a long-term bank loan
C.
Issuing new debentures (bonds) to purchase machinery
D.
Revaluing property upwards
How to approach this question
Analyze the formula: Gearing = Debt / Equity. To increase the ratio, you must either increase Debt or decrease Equity.
Full Answer
C.Issuing new debentures (bonds) to purchase machinery✓ Correct
Gearing measures the proportion of debt to equity. Issuing new debentures increases long-term debt, thereby increasing the numerator and the overall gearing ratio. The other options either increase equity or decrease debt, both of which lower gearing.
Common mistakes
Thinking that buying machinery with cash affects gearing (it only affects liquidity).
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