#1
What does gearing refer to in finance?
The process of leveraging funds to increase returns
ExplanationGearing refers to leveraging funds to boost returns.
#2
Which of the following statements about gearing is true?
Gearing involves borrowing money to invest in assets
ExplanationGearing entails borrowing money for asset investment.
#3
What is the debt-to-equity ratio used for?
To measure a company's financial leverage
ExplanationDebt-to-equity ratio gauges a company's financial leverage.
#4
What is financial leverage?
The degree to which a company relies on debt
ExplanationFinancial leverage denotes a company's reliance on debt.
#5
What is the gearing ratio formula?
Total debt / Total equity
ExplanationGearing ratio formula: Total debt divided by Total equity.
#6
Which of the following is a disadvantage of high gearing?
Increased financial risk
ExplanationHigh gearing leads to increased financial risk.
#7
What is the primary goal of financial gearing?
To increase returns for shareholders
ExplanationThe primary goal of financial gearing is to boost shareholder returns.
#8
Which of the following factors influences a company's gearing ratio?
All of the above
ExplanationAll listed factors influence a company's gearing ratio.
#9
How does high gearing affect a company's financial risk?
It increases financial risk
ExplanationHigh gearing heightens a company's financial risk.
#10
What is operating leverage?
The degree to which a company relies on fixed costs
ExplanationOperating leverage reflects a company's reliance on fixed costs.
#11
How does financial leverage amplify returns for shareholders?
By magnifying the effects of positive returns on equity
ExplanationFinancial leverage magnifies positive equity returns.
#12
Which of the following is an example of financial leverage?
Borrowing money to buy back company stock
ExplanationUsing borrowed funds to repurchase company stock.
#13
What is financial distress?
A situation where a company cannot meet its financial obligations
ExplanationFinancial distress occurs when a company can't meet obligations.
#14
How does gearing affect a company's cost of capital?
It increases both the cost of equity and the cost of debt
ExplanationGearing raises both equity and debt costs of capital.