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Hello John,
Its part c of this question.
Last heading in BPP solution,
debt capacity.
The last two lines say when two organisations in two different business merge the combined orgsnisation will have less variable earningsand may be able to borrow more (have a higher debt ratio) then the individual entities could.
I can’t get my thoughts organised in order to get this point. Could you explain what does this point really mean I hope this will help other students too. Thank youThis is referring to diversification (which is really P3 and is also discussed in my P4 lectures on portfolio theory).
The more companies diversify the more potentially they can reduce the business risk, and therefore they might be prepared to accept more financial risk by borrowing more.
You do not need to worry about other students – I always answer questions posted here! 🙂
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