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Financing – Capital structure

Other aspects of gearing

4.1 The impact on financial ratios of a change in capital structure

When an entity changes its capital structure, there will be an impact on ratio analysis
(especially the gearing ratio).

Exam questions often test the calculation of gearing ratios before and
after a change in capital structure.

A useful application of the impact of financing decisions on ratio analysis is in the
context of debt covenants.

For example, the gearing ratio is often used in debt covenants an entity might have to
keep its gearing ratio below a given percentage to comply with its debt covenants.

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