Capital Structure Objectives (AQA A-Level Business): Flashcards
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Capital structure definition
Capital structure definition
How a business finances its long-term operations and growth
Two components of long-term capital
Two components of long-term capital
Equity (share capital) and borrowing (loan capital)
Equity definition
Equity definition
Money raised by selling shares to investors
Borrowing/loan capital definition
Borrowing/loan capital definition
Money raised through bank loans and other forms of debt
Gearing ratio purpose
Gearing ratio purpose
Measures proportion of long-term capital from borrowing
Gearing ratio formula
Gearing ratio formula
(Loan capital / total capital) × 100
High gearing threshold and meaning
High gearing threshold and meaning
Above 50%; heavy reliance on borrowing, greater financial risk
Low gearing threshold and meaning
Low gearing threshold and meaning
Below 50%; more equity finance, safer financial position
Why high borrowing creates financial risk
Why high borrowing creates financial risk
Greater interest obligations regardless of profits
Rising interest rates effect on high gearing
Rising interest rates effect on high gearing
Increased costs, reduced profit margins, more vulnerability