The directors of Atono plc were informed at a golf outing by fellow directors that it is

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The directors of Atono plc were informed at a golf outing by fellow directors that it is more valuable to have debt in a company's capital structure than equity, as debt is cheaper than equity. Atono plc currently has no debt in its capital structure, though is considering borrowing funds, which it will use to buy back the more expensive equity capital. The capital structure of Atono plc is as follows:
The directors of Atono plc were informed at a golf

Additional information:
1. The company's equity shares are currently trading at £20 each, and it is assumed that this value does not change when the suggested capital structure change takes place.
2. The long-term debt attracts an interest rate of 8 per cent.
3. Taxation is 30 per cent.
Required
Calculate the gearing ratio for Atono plc under both scenarios.

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...
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Related Book For  book-img-for-question

Introduction To Financial Accounting

ISBN: 978-0077138448

7th edition

Authors: Anne Marie Ward, Andrew Thomas

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