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The Finance Section Glossary

Currently viewing the definition of: Gearing


	gearing = debt / equity or gearing = debt / debt + equity Businesses will analyse their weighted average cost of capital to determine what is the optimum ratio of debt and equity. However shareholders will prefer the percentage of equity to be considerably greater than the percentage of debt. This is because any increase in profits will then be attributable to shareholders. Also interest on debt must be paid irrespective of profit levels where as dividends can be waived.

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