Effect of additional debt finance on financial position, Financial Accounting

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Q. Effect of Additional Debt Finance on Financial Position?

Debt finance of $3·2m would raise gearing on a book value basis from 54% to 203% ((1167 + 3200)/2150) which is five times the sector average. If the overdraft is mistreated in calculating gearing it would still be four times the sector average at 148% (3200/2150). Assume interest at a fixed rate of 8% our interest cover would fall from 9 times to 1·9 times (630/(272 + 70)). This is a hazardously low level of interest cover. We would require assessing whether we could offer security for a loan of this size.


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