In the context of financial structure, which of the following statements is not
ID: 2591917 • Letter: I
Question
In the context of financial structure, which of the following statements is not true? as long as the return generated from borrowed funds exceeds the rate of interest payable, the ordinary shareholders will benefit. the gearing ratio considers the significance of a company's debt relative to equity high levels of gearing may be perceived as risky, because of the company's commitment to pay a given sum of interest, regardless of how much profit is generated the interest cover ratio equals the rate of interest payable on a loan Which of the following would definitely improve both gross profit as reported in the Income Statement and gross profit margin (assuming cost price per unit stays the same)? Selling more units at a higher selling price per unit. Selling more units at a lower selling price per unit Selling fewer units at a higher selling price. Selling fewer units at a lower selling price.Explanation / Answer
In the context of financial structure, statement (d) is not true i.e. the interest cover ratio euals the rate of interest payable on a loan. The interest cover ratio is an indiactor of the company's ability to pay the fied financial charges of interest on long term debt. It is calculated as the ratio of earnings before interest and tax and annual interest expenses. Rest all the statements are true.
Option (d) Selling more units at a higher selling price per unit would definitely improve both Gross profit as reported in the Income statement and gross profit margin.This will lead to an overall increase in sales and the cost of goods sold remaining constant, gross profit will definitely increase. Gross margin is calculated as gross profit being a percentage of Net sales. Since both the numerator and denominator will increase, it would lead to an improvement in gross profit margin.