Greg is doing some research on a potential supplier and is concerned that the supplier's funding is based on long-term debts and loans. Working with this supplier therefore might bring additional risks to Greg's business. What should Greg do about his concerns?
Answer(s): D
Greg needs to use a gearing ratio. Gearing is a measure of how the business is being funded and is based on the ratio of debt to equity Gearing comes up a lot in the exam. Also make sure you know what Return on Investment, Acid Test and EBITDA are.Return on Investment (ROI): How to Calculate It and What It Means (investopedia.com) EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com) Acid-Test Ratio: Definition, Formula, and Example (investopedia.com)
Kiran is appraising some potential suppliers and has noticed that one of these suppliers has an extremely high gearing ratio. What would this suggest?
Answer(s): B
The correct answer is 'the supplier has a lot of long-term debt'. Gearing is a measure of how the business is being funded and looks at the ratio of debt to equity. For example if they have taken out lots of loans and mortgages, this would equate to a lot of debt which means a poor gearing ratio.Gearing is a hot topic for the exam.
What would an EBITDA ratio show you?
Answer(s): A
EBITDA stands for 'earnings before interest, tax, depreciation and amortization'. This is a profitability ratio and would show how profitable a business is.EBITDA: Definition, Calculation Formulas, History, and Criticisms (investopedia.com)
A company has a low gearing of 20%. This shows that the company relies on equity capital and should therefore have less difficulty coping during tough economic times. Is this statement TRUE?
the correct answer is 'Yes- a low gearing ratio means the company's finances are made up of equity rather than debt'.Remember low gearing = good (based on equity), high gearing = bad (based on debt). Anything over 50% is considered high.The two no answers are therefore incorrect and you can discount these straight away. The other yes answer is one of those answers which COULD be true, but isn't always true, and we'd need more information to know for sure. When you get options like this there will be one that is always right and one which is sometimes right - so always pick the always right one. Dealing with supply chain disruptions is complex, and depending what the disruption is, how big it is, what the industry is etc determines whether a supplier can handle it or not. Because there's more factors to consider than just gearing, this isn't the right answer.
Which of the following is an example of intracompany trading? Select TWO
Answer(s): B,D
Intracompany trading is when two departments in the same company do trading. AND when two companies owned by the same parent company do trading. INTRA means 'within' - so it's doing business with yourself.
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