The following items have been taken from the Balance Sheets of two public limited companies, Mercedes and Tesla, which are giants and fierce competitors in the motor manufacturing industry. Both have identical capitalisation of 651 million.

Debentures Reserves

Bank Loan - 9 years Ordinary Shares Preference Shares

TESLA

651,000,000

MERCEDES

199,000,000 56,000,000 9,000,000 139,000,000 248,000,000

651,000,000

a. Calculate gearing for Mercedes and Tesla; make sure to show the full formula (either the short version or long version) for gearing together with your calculations.

b. Define Gearing and then advise the company with the highest gearing on how it can lower its gearing position.

c. Why would this company want to lower its gearing position?

d. Make inter-firm comparisons based on your findings on gearing percentages and nothing

else, which of the two companies carries a high risk for ordinary shareholders?