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Questions and Answers
What is the meaning of 'capital gearing' or 'financial leverage'?
What is the main objective of optimizing the capital structure of a business?
What does 'high gearing' or 'working on thin equity' refer to in the context of capital structure?
How does the cash flow position impact the choice of capital structure?
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What does business finance involve?
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Why is the availability of sufficient finance essential for carrying out business operations?
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What does the term 'capital' refer to in the context of business finance?
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How does business finance help firms to face challenges such as recession and trade cycle?
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What affects the requirement for working capital during a period of depression?
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In which season would a business require higher working capital according to the text?
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What factor affects the amount of funds required for raw materials and expenses in a business?
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What results in a higher requirement of working capital for a firm?
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What does the Debt Service Coverage Ratio (DSCR) indicate?
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How does a higher Return on Investment (RoI) affect a company's ability to use debt?
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How does a lower cost of debt impact a firm's capacity to employ debt?
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How does the tax rate affect the cost of debt?
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Study Notes
Capital Structure and Business Finance
- Capital gearing or financial leverage refers to the proportion of debt and equity in a company's capital structure.
Objectives of Capital Structure
- The main objective of optimizing the capital structure of a business is to maximize shareholders' wealth.
High Gearing
- High gearing or working on thin equity refers to a situation where a company has a high proportion of debt in its capital structure.
Cash Flow and Capital Structure
- The cash flow position of a company impacts the choice of capital structure, as a company with a strong cash flow position can take on more debt.
Business Finance
- Business finance involves the management of a company's funds, including sourcing, allocation, and utilization of funds to achieve business objectives.
Importance of Finance
- The availability of sufficient finance is essential for carrying out business operations, as it enables companies to invest in assets, pay expenses, and meet financial obligations.
Capital in Business Finance
- In the context of business finance, 'capital' refers to the funds invested in a business, including debt and equity.
Managing Challenges
- Business finance helps firms to face challenges such as recession and trade cycle by providing them with the necessary funds to invest in new opportunities and manage risks.
Working Capital Requirements
- During a period of depression, the requirement for working capital is affected by the need to maintain a higher level of inventory and provide more credit to customers.
Seasonal Working Capital Requirements
- A business may require higher working capital during peak seasons, such as summer or festive seasons, when demand is higher.
Factors Affecting Working Capital
- The amount of funds required for raw materials and expenses in a business is affected by the level of production, seasonal fluctuations, and inflation.
Higher Working Capital Requirements
- A higher requirement of working capital for a firm results from an increase in production, expansion of business, or a delay in receiving payments from customers.
Debt Service Coverage Ratio (DSCR)
- The DSCR indicates a company's ability to pay its debt obligations, including interest and principal, from its earnings.
Return on Investment (RoI) and Debt
- A higher RoI affects a company's ability to use debt, as it increases the company's capacity to service debt.
Cost of Debt
- A lower cost of debt impacts a firm's capacity to employ debt, making it a more attractive option for financing.
Tax Rate and Cost of Debt
- The tax rate affects the cost of debt, as interest payments on debt are tax-deductible, reducing the effective cost of debt.
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Description
Test your knowledge of interest coverage ratio with this quiz. Learn to calculate the interest coverage ratio using the formula and understand its implications on a company's financial health.
