{"id":501,"date":"2014-06-23T16:12:13","date_gmt":"2014-06-23T16:12:13","guid":{"rendered":"http:\/\/zh.aceessays.com\/tc\/?p=501"},"modified":"2015-01-18T20:41:05","modified_gmt":"2015-01-18T20:41:05","slug":"what-is-gearing","status":"publish","type":"post","link":"https:\/\/www.aceessays.com\/tc\/what-is-gearing\/","title":{"rendered":"What is gearing?"},"content":{"rendered":"<h3>What is gearing?<\/h3>\n<ul>\n<li>The mixture of debt finance relative to equity finance that a company uses to finance its business operations<\/li>\n<li>Gearing ratios assess financial risk:<\/li>\n<\/ul>\n<blockquote>\n<ul>\n<li>Debt\/equity ratio:\tD\/E<\/li>\n<li>Capital gearing:\tD\/(D+E)<\/li>\n<li>Market values preferred to book values <\/li>\n<\/ul>\n<\/blockquote>\n<ul>\n<li>Should D include short-term debt?<\/li>\n<\/ul>\n<h3>Implications of high gearing<\/h3>\n<ul>\n<li>Increased volatility of equity returns arises with high gearing since interest must be paid before paying returns to shareholders.<\/li>\n<li>Increased risk of bankruptcy also occurs.<\/li>\n<li>Stock exchange credibility falls as investors learn of company\u2019s financial position.<\/li>\n<li>Short-termism moves managers\u2019 focus away from maximisation of shareholder wealth.<\/li>\n<\/ul>\n<h3>Optimal capital structure<\/h3>\n<p>Key question:<\/p>\n<ul>\n<li>Does the mix of debt and equity finance used by a company affect its weighted average cost of capital?<\/li>\n<li>Is there a mix of debt and equity that will minimise the average cost of capital?<\/li>\n<li>Minimum cost of capital will maximise market value of company and hence maximise shareholder wealth.<\/li>\n<\/ul>\n<h3>Simplifying assumptions<\/h3>\n<ul>\n<li>No taxes exist.<\/li>\n<li>Financing choice is between ordinary shares and perpetual debt.<\/li>\n<li>Capital structure changes incur no cost and entail replacing debt with equity or vice versa.<\/li>\n<li>All earnings are paid out as dividends.<\/li>\n<li>Business risk is constant over time.<\/li>\n<li>Earnings and hence dividends are constant.<\/li>\n<\/ul>\n<p>\nHow to write an essay: <a href=\"http:\/\/www.aceessays.com\/tc\/\">\u8ad6\u6587\u4ee3\u5beb<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What is gearing? The mixture of debt finance relative to equity finance that a company uses to finance its business operations Gearing ratios assess financial risk: Debt\/equity ratio: D\/E Capital gearing: D\/(D+E) Market values preferred to book values Should D include short-term debt? Implications of high gearing Increased volatility of equity returns arises with high gearing since interest must be paid before paying returns to shareholders. Increased risk of bankruptcy also occurs. Stock exchange credibility falls as investors learn of company\u2019s financial position. Short-termism moves managers\u2019 focus away from maximisation of shareholder wealth. Optimal capital structure Key question: Does the mix of debt and equity finance used by a company affect its weighted average cost of capital? Is there a mix of debt and equity that will minimise the average cost of capital? Minimum cost of capital will maximise market value of company and hence maximise shareholder wealth. Simplifying assumptions<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[22],"tags":[],"class_list":["post-501","post","type-post","status-publish","format-standard","hentry","category-notes"],"_links":{"self":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts\/501","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/comments?post=501"}],"version-history":[{"count":1,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts\/501\/revisions"}],"predecessor-version":[{"id":1527,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts\/501\/revisions\/1527"}],"wp:attachment":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/media?parent=501"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/categories?post=501"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/tags?post=501"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}