Which of the following would cause a company's gearing ratio (Debt / Equity) to increase?

Answer options:

Making a rights issue of shares

Repaying a long-term bank loan

Issuing new debentures (bonds) to purchase machinery

Revaluing property upwards

How to approach this question

Analyze the formula: Gearing = Debt / Equity. To increase the ratio, you must either increase Debt or decrease Equity.

Full Answer

C.Issuing new debentures (bonds) to purchase machinery✓ Correct

Gearing measures the proportion of debt to equity. Issuing new debentures increases long-term debt, thereby increasing the numerator and the overall gearing ratio. The other options either increase equity or decrease debt, both of which lower gearing.

Common mistakes

Thinking that buying machinery with cash affects gearing (it only affects liquidity).

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