An energy company issues $5 million of new equity shares to repay $5 million of its long-term bank loans. Assuming no other changes, what is the immediate effect of this transaction on the company's gearing ratio and interest cover?

Gearing measures the proportion of debt to equity (or debt to total capital). Repaying loans with equity reduces debt and increases equity, significantly lowering the gearing ratio. Furthermore, lower debt results in lower finance costs (interest). Since Interest Cover = Operating Profit / Finance Costs, a lower denominator increases the interest cover ratio.