ACCA Applied Knowledge · Financial Accounting · Ratios
Which one of the following events would be expected to increase a company's debt/equity gearing ratio?
Issuing a loan note and using the proceeds to buy back shares increases gearing, because debt rises while equity falls. The other events either reduce debt, increase equity or merely reclassify reserves within equity.
- AIssuing a new 7% loan note and using the cash to buy back ordinary sharesCorrect
- BMaking a rights issue of ordinary shares to repay a loan
- CCapitalising retained earnings through a bonus issue of shares
- DConverting a loan note into ordinary shares
Explanation
Issuing a loan note raises debt and buying back shares reduces equity, so both changes increase debt/equity. A rights issue to repay a loan lowers gearing, and conversion of debt to shares lowers it too. A bonus issue only moves amounts within equity and leaves gearing unchanged.
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