Determine finance growth and evolution, Financial Management

Assignment Help:

a) Debentures are a source of external long term (loan) finance for which interest is paid to the debenture holder. Debenture holders do not usually have voting or ownership rights in the organisation.

b) Year 2

Year 1

250 ÷ 1,000

250 ÷ 800

= 25 %

= 31.25 %

Full working out compulsory for full marks

c) The gearing ratio is a long term liquidity ratio that calculates the percentage of a firm's capital employed that comes from long-term liabilities, such as debentures. JKL Ltd. has less than 50% gearing so is considered to be comparatively safe, given the limited information given.

The firm has lower gearing in Y2 meaning that it is less susceptible to any increases in interest rates, i.e. it represents less risk. However, there is a need to benchmark this ratio with the industry norm before any firm conclusions can be prepared about the organisation's liquidity position.

d) The costs and remuneration of high gearing should be considered. For example, having high gearing during times of rising interest rates is likely to be risky (even if the economy is doing well) as the higher loan repayments will obstruct the firm's working capital. However, high gearing might be essential for a firm that lacks internal funds to finance growth and evolution.

In the case of JKL Ltd. the fall in its gearing ratio is not essentially a good thing, e.g. can JKL Ltd. afford to have higher gearing to money expansion, particularly since it has higher net profit and retained profit in Y2.


Related Discussions:- Determine finance growth and evolution

Explain term lenders, Lenders Lenders are concerned to receive payment ...

Lenders Lenders are concerned to receive payment of interest and ultimate re-payment of capital. They don't share in the upside of very successful organisational strategies as

Capital asset pricing model, Can you draw Capital asset pricing model with ...

Can you draw Capital asset pricing model with example and explain?????

Brief of volatility of interest rate, Historically, three types o...

Historically, three types of shapes have been observed for the yield curve. The relative change in the yield for each treasury maturity is known as a

What is business risk, What is Business risk It is related to response ...

What is Business risk It is related to response of the firm's earnings before taxes andinterest, or operating profits, to changes in sales. When cost of capital is used to eval

Can a company have a default rate on its accounts receivable, Can a company...

Can a company have a default rate on its accounts receivable that is too low?  Explain. A company could comprise a default rate on AR that would be referred too low if by liberal

Valuation using treasury spot rates, To understand how treasury spot ...

To understand how treasury spot rates are used to calculate the arbitrage-free value of the treasury security, we will take imaginary treasury spot rates (given i

State the different accounting policies, State the different accounting pol...

State the different accounting policies Different accounting policies which can be adopted will have an influence on the ratios calculated and hence make comparisons more diffi

What are the corporate bonds, What are the Corporate Bonds? Corporate ...

What are the Corporate Bonds? Corporate bonds are issued by huge corporations while they require long-term financing. They generally make interest payments double a year (sem

Types of investment strategy of hedge funds, Various Types of Strategies ...

Various Types of Strategies Different types of hedge fund strategies are discussed as follows: Relative Value of Strategies: Relative value strategies are also known as no

Brigham, how do legal consideration affect a firms credit policy

how do legal consideration affect a firms credit policy

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd