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420 Which of the following would increase a company’s gearing ratio?
A A decrease in long?term loans that is less than a decrease in equity
B A decrease in long?term loans that is more than a decrease in equity
C An increase in interest rates
D A decrease in interest ratesAnswer is A, but why is A, Can you explain in mathematical term, please?
The easiest way to do this kind of question is to make up a quick little example for yourself.
For instance, suppose at the moment the equity is 100 and the debt is 50. So the gearing ratio is 0.5.
Reduce the equity by 10% and and the debt by 5% and see what happens to the gearing ratio.
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