Finance-Gearing

[Albina]

Hello, hello, everyone!

The short finance lesson today is about "gearing":

To ensure a company's long-term survival and prosperity, finance managers need to make decisions about the "gearing" of the company. Gearing is the relationship between equity capital invested in the business and long-term debt. The higher the gearing (in other words, the greater the proportion of long-term debt ), the more exposed the company is in times of economic difficulty.

1. Analyse the gearing of these two companies and comment on the dangers:
COMPANY A
Equity 100,000
Long-term debt 300,000
Profits 50,000
Interest paid (10%) 30,000
Earnings 20,000

COMPANY B
Equity 250,000
Long-term debt 150,000
Profits 30,000
Interest paid (10%) 15,000
Earnings 15,000


taken from: "FINANCE" ,by Jeremy Comfort and Nick Brieger