Business financial management - Essay Example

In the year 2004, this amount increased by about 9%, while in 2005 it fell by 19%. This suggests that this amount responded as the sum of long-term debt fluctuated. Also, the company's gearing policy, as suggested by above ratio is to maintain a mixed structure of capital and rely on equity funds more than the borrowed capital, because debt demands fixed payment of interest to the lenders whereas dividends are decided by the management according to their future plans. The gearing ratio of Baa plc reveals that the company's debt at market value is about 95% of the total funds invested by the shareholders.

It also means that the company has kept the level of debt slightly below the equity capital so as to avoid interest payments. Koch and Shenoy (1999, p18) posit that, "an increase in leverage due to a debt offering will initially provide more cash for possible over investment, but over time the higher interest expense will decrease the cash available for over investment". Hence, the company might have adopted this strategy to keep the interest payment at a minimum level. The gearing policy of the company as illustrated in part A also reflects that the company has opted to continually decreas.

In the year 2004, this amount increased by about 9%, while in 2005 it fell by 19%. This suggests that this amount responded as the sum of long-term debt fluctuated. The amount of long-term debt was 49% of the total capital invested in the company for the year 2003, which rose to 53% in 2004 and declined to 52% in 2005.This suggests that about half the company's total capital comes from external sources i.e., lenders and other outsiders. This in turn also reflects the gearing policy of the company to keep the level of long-term debt in the company at a balanced level Also, the company's gearing policy, as suggested by above ratio is to maintain a mixed structure of capital and rely on equity funds more than the borrowed capital, because debt demands fixed payment of interest to the lenders whereas dividends are decided by the management according to their future plans.

Part B: Gearing RatioBaa Plc 2005Market Value Debt 4,150 = 95%Total Shareholders' Equity 4,374 The gearing ratio of Baa plc reveals that the company's debt at market value is about 95% of the total funds invested by the shareholders. It also means that the company has kept the level of debt slightly below the equity capital so as to avoid interest payments. Koch and Shenoy (1999, p18) posit that, "an increase in leverage due to a debt offering will initially provide more cash for possible over investment, but over time the higher interest expense will decrease the cash available for over investment".

Hence, the company might have adopted this strategy to keep the interest payment at a minimum level. The gearing policy of the company as illustrated in part A also reflects that the company has opted to continually decrease the percentage of long-term debt in the total