Business – 10.2 Analysis of published accounts – Gearing ratio | e-Consult
10.2 Analysis of published accounts – Gearing ratio (1 questions)
Login to see all questions.
Click on a question to view the answer
Answer:
Retained Earnings
- Advantages:
- No dilution of existing shareholders’ ownership.
- No issuance costs (e.g., underwriting, legal fees).
- Signals confidence in the business’s profitability.
- Disadvantages:
- May limit the amount of capital available if profits are low.
- Opportunity cost of not distributing dividends to shareholders.
- Potentially slower to raise large sums compared with external financing.
Issuing New Equity
- Advantages:
- Provides a substantial influx of cash quickly.
- Reduces debt proportion, directly improving gearing.
- Can attract new investors and broaden the shareholder base.
- Disadvantages:
- Dilutes existing shareholders’ voting power and earnings per share.
- Incurs issuance costs and may be subject to market conditions.
- May be perceived negatively if the market questions the need for additional equity.
In practice, firms often use a combination of both methods to balance the trade‑offs and achieve an optimal gearing structure.