Page 296 - F3 -FA Integrated Workbook STUDENT 2018-19

Chapter 20

4.4 Gearing: reasons for movement

Increased gearing

 issue of loan notes or redeemable preference shares

 trading losses causing reduction in retained earnings

 excessive dividends paid that reduce retained earnings

Reduced gearing

 repayment of loan notes or redeemable preference shares

 trading profits increasing retained earnings

 revaluation of non-current assets, increasing revaluation surplus

4.5 Interest cover: calculation

Profit before interest
—————————
Finance costs

 Indicates how many times interest costs could be paid from current profit level

 Used by lenders to assess risk of default

 Lenders may insist on maintenance of minimum interest cover as part of loan
agreement

290