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JAMB Economics 1989 Question 26

Question 26

Business Organisations

A company is said to be highly geared if the

  1. A.value of fixed interest loans is high compared with share capital
  2. B.value of share capital is high compared with fixed interest loans
  3. C.dividend rate is high
  4. D.interest rate is high.
Show the answer and explanation

Answer: A (value of fixed interest loans is high compared with share capital)

Explanation

Gearing compares borrowed (fixed-interest) capital with share capital; a highly geared company relies heavily on loans.