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june 2008

This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.

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September 27, 2018 at 8:27 am #475837
toushiga
Participant
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Hello Tutor,
For past year exam June 2008 Q2 part (e),
The examiner answer: “If THP Co expects buoyant economic conditions and increasing profitability in the future, it will be more prepared to take on
fixed interest debt commitments than if it believes difficult trading conditions lie ahead.”
I doubt about why the business will be more prepared to take debt instead of equity in the economic boom? What is the reason?
Thank you.
September 27, 2018 at 9:29 am #475857
John Moffat
Keymaster
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If sales increase, then if there is fixed interest payable the profit available for shareholders will increase at a greater rate than the increase in the sales.
I explain this in my lectures on example 1 of Chapter 13 of our lecture notes.
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