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Financial Management

Practice

QuestionAnswer
Why is it important to match the term of the loan to the life asset for which the finance was obtained? Because fix assets can depreciate over time, the interest paid on the loan may exceed the value of the asset. Therefore you do not want to keep paying off the loan, if the value of the asset has decreased (like a car or laptop)
What is Gearing/Leverage? Gearing is the ratio of a companies use of debt and equity finance. Shows how much the business is funded by lenders (bank) or shareholders (owners)
Why may high gearing/leverage be of concern for a business? Can be unappealing to investors as lenders may have some claim over the business assets. Being high leveraged on the other hand means that the business is not spending money on growing, expanding, and innovating.
Classification of Types of finance? Debt Finance: Borrowed money that you pay back with interest within an agreed time frame. Including bank loans, overdrafts, and mortgages. Equity Finance: Process of raising capital through the sale of shares or assets.
Created by: user-1837778
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