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Hi sir,
Question 179 says, AB co has intersest cover greater than one and gearing (debt/ debt+equity) of 50%.
Why would the interest cover fall when issuing shares to repay half the debt?
I would assume the interest the company will have to pay will go up because more shares are issued, therefore have to pay more interest on dividends.Unless what i’m saying is wrong. Could you please explain this to me
I only have the current edition of the Revision Kit.
However, there is no interest paid on dividends!! Interest is paid on the debt.
If there is less debt because half is repaid, then there is less interest to pay. If there is less interest to pay then the interest cover will increase, not fall (and the answer in the BPP Kit says that the interest cover will increase).
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