Gearing (AQA A-Level Business): Flashcards
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Practise the cards
10 cards from this deck
Gearing measures
Gearing measures
Proportion of funding from non-current liabilities vs equity
Gearing formula
Gearing formula
Non-current liab./(Total equity + Non-current liab.) × 100
High gearing threshold
High gearing threshold
Above 50%
Low gearing threshold
Low gearing threshold
Below 25%
Standard gearing range
Standard gearing range
25%-50%
Why high gearing increases interest rate vulnerability
Why high gearing increases interest rate vulnerability
More borrowing means higher interest payments when rates rise
Main risk of high gearing for business
Main risk of high gearing for business
Can't afford loan & interest repayments, may fail
Main reward of high gearing for business
Main reward of high gearing for business
Extra funds for expansion & growth
Risk for investors in high-geared business
Risk for investors in high-geared business
May lose investment if business fails/enters liquidation
Who's paid first in liquidation
Who's paid first in liquidation
Lenders with secured loans, then shareholders last