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Hello Sir,
This is what’s given in answer guide for GRENARP CO- JUNE 2015, : “It is further assumed
that companies can change their capital structure by replacing equity with debt, and vice versa, so that the amount of finance invested remains constant, irrespective of capital structure. The term ‘gearing up’ therefore refers to replacing equity with debt in the context of theoretical discussions of capital structure”(A) Isnt’t the prase about finance invested not changing incorrect?
(B) Does replacing equity merely mean issuing debt instead of issuing equity?Thank you !
In the context of that answer, replacing equity with debt means raising debt and using the money raised to buy back and cancel equity.
In more general terms, since gearing is measured as a ratio, gearing up means raising more debt so as to increase the ratio (and doesn’t require the cancellation of equity).
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