Advanced Higher Business Management Practice Questions - Advanced Higher Business Management (Qualifications Scotland SCQF Level 7) Exam

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A firm's capital structure consists of £60 million in long-term debt and £40 million in equity. How should a manager evaluate this capital gearing position?

The firm is low-geared at 40%, meaning financial risk is minimal and interest obligations are negligible. The firm is high-geared at 40%, indicating that equity financing dominates the capital structure. The firm is high-geared at 60%, exposing the business to increased financial risk if interest rates rise or revenues decline. The firm is neutral-geared at 100%, indicating perfect balance between fixed assets and working capital.

Correct Answer:

The firm is high-geared at 60%, exposing the business to increased financial risk if interest rates rise or revenues decline.

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