Gearing ratios are financial ratios that compare some form of owner's equity (or capital) to debt, or funds borrowed by the company. Gearing is a measurement of the entitys financial leverage, which demonstrates the degree to which a firm's activities are funded by shareholders' funds versus creditors' funds. The gearing ratio is a measure of financial leverage that demonstrates the degree to which a firm's operations are funded by equity capital versus debt financing. There are a number of ways to implement a gearing strategy. For example, the security provided may be a property in the case of home gearing, or underlying shares and managed funds for a margin loan. The portfolio may be positively, neutrally or negatively geared. There can also be more complex structures such as in the case of a self-funding instalment warrant or protected equity loan. While they may all differ in some way, there are some common benefits and risks that need to be considered with all gearing strategies.

Required:

Explain the problems with high levels of gearing in capital structure decision?