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The Relationship Between Contribution and Profit Before Interest and Tax - Statistics Project Example

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The paper describes the two broad financing options available for any company that is Equity and Debt Financing. Equity Finance is to raise finance by issuing shares, rights issue or by utilizing existing retained earnings of a company. Finance is gathered by all such modes and then it is used upon in profitable ventures…
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The Relationship Between Contribution and Profit Before Interest and Tax
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Download file to see previous pages According to the Gearing ratios calculated above, TESCO’s capital structure shows a heavy reliance upon Debt finance in the Year 2009 whilst in 2008 it has been more involved with equity financing. According to the financial gearing ratio, any company having a gearing ratio of less than 100% is deemed to be a low geared company, at 100% it is said to be neutrally geared and above 100% ratio indicates a highly geared company. With reference to this information, the TESCO seems to be a low geared company in 2008 with a sudden increase in its debt making it a highly geared company in 2009. On the contrary, according to the Debt/Equity ratio, 50% is regarded as a safe limit to debt but in TESCO’s case, both the year 2008 and 2009 has an increased level of debt making the company too much dependent upon debt financing. This may refrain them from acquiring any major borrowing from any institution in the future as their ratio buzzers an alarming position, besides if TESCO obtains debt finance in the future, it would have to pay a heavy amount of return to its creditor because the one giving out the loan to the company would be exposed to greater risk in the future as compared to prior years. Interest cover is a measure of financial risk i.e. it shows a company able to pay off its interest obligation on any borrowings that it has made with the profit that it makes in that period. TESCO’s interest cover s not that low compared to the fact that the company has a good profitability rate. Despite the increase in borrowings and interest paid by the company, it has an increase of approximately 2% in profits for 2009 as compared to 2008. ...Download file to see next pagesRead More
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