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W and Y are very similar entities with the same level of profit before interest and tax. However, W has gearing of 95% and Y has gearing of 30%.
Which of the following statements is true?
Suggested Answer: A, B, C, D
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31 comments · newest first
EL
Eleonore
11 months ago
Higher gearing usually means higher risk, so yeah, W's risky!
CH
Chaya
11 months ago
I doubt Y has a greater commitment to interest payments.
NA
Nancey
11 months ago
Wait, how can W have more profit for dividends with that gearing?
JE
Jennifer
12 months ago
Totally agree, W's risk profile is concerning.
JO
Joanna
12 months ago
W's gearing is way higher, definitely riskier.
AD
Adela
12 months ago
I’m confused about D; I thought W would have a lower commitment to interest payments since it has higher gearing.
AN
Antonio
1 year ago
I feel like I’ve seen a question like this before, and I think investors in Y would expect a higher return due to lower risk. So maybe C is the answer?
DA
Dawne
1 year ago
I’m not sure, but I think W might have more profit available for dividends because of its gearing. Could it be B?
LA
Lavonda
1 year ago
I remember studying that higher gearing usually means higher risk, so I think A might be correct.
FR
France
1 year ago
Tricky question. I'll need to think through the impact of gearing on risk, dividends, and expected returns. Let me work through this step-by-step.
JE
Jesusita
1 year ago
I've got this! The higher gearing of W means a greater proportion of its profits will go towards interest payments, leaving less available for dividends. So B is the correct answer.
MA
Mariann
1 year ago
I'm a bit confused by this one. I know gearing is related to debt levels, but I'm not sure how that translates to the statements given. I'll need to review my notes on this topic.
CA
Carma
1 year ago
Okay, I think I know the answer here. The higher gearing of W means it has a higher level of debt, so investing in W would carry more risk than Y.
DW
Dwight
1 year ago
Hmm, this question is testing my understanding of gearing and risk. I'll need to think carefully about the implications of the different gearing levels.
JE
Jess
1 year ago
I'm just gonna go with A) and hope the examiner has a good sense of humor. After all, 95% gearing? That's like playing financial Russian roulette!
TA
Tammi
1 year ago
Let's hope the examiner appreciates our humor.
RI
Ricki
1 year ago
Yeah, 95% gearing does sound risky.
VI
Vicki
1 year ago
I think A) is the safest bet here.
KA
Kara
1 year ago
B) A greater proportion of profit will be available out of which to declare a dividend in W. Hmm, I don't think so. The high gearing in W means more of the profits will go towards servicing the debt, leaving less for dividends.
MI
Micheal
1 year ago
D) Y has a greater commitment to meet interest payments than W. Haha, nice try, but no. The high gearing of 95% in W actually means it has a greater commitment to meet interest payments, not Y.
AL
Alana
1 year ago
C) Investors in Y will expect a higher return than investors in W. This makes sense, as Y has lower gearing and hence lower risk, so investors would expect a lower return.
BL
Blythe
1 year ago
D) Y has a greater commitment to meet interest payments than W.
GE
Gerald
1 year ago
B) A greater proportion of profit will be available out of which to declare a dividend in W.
RA
Rashad
1 year ago
A) Investing in W carries a higher level of risk than investing in Y.
JU
Julio
2 years ago
A) Investing in W carries a higher level of risk than investing in Y. This is clearly the correct answer. The high gearing of 95% in W means it has a much higher debt burden, making it a riskier investment.
NI
Nieves
1 year ago
User 3: D) Y has a greater commitment to meet interest payments than W.
NG
Nguyet
1 year ago
User 2: B) A greater proportion of profit will be available out of which to declare a dividend in W.
GL
Glory
1 year ago
User 1: A) Investing in W carries a higher level of risk than investing in Y.
CO
Coral
2 years ago
I think investors in Y will expect a higher return than investors in W.
CA
Cathrine
2 years ago
I disagree, I believe a greater proportion of profit will be available out of which to declare a dividend in W.
KA
Kathrine
2 years ago
I think investing in W carries a higher level of risk than investing in Y.