What are the two major problems with relying on the measure Capital gearing = Long- term debt/Shareholders' funds?
A) It ignores the fact that many firms have no access to overdrafts or similar borrowing.
B) The book value of assets can be quite different from the sale value.
C) A range of values from zero to infinity is possible and this makes inter- firm comparisons difficult.
D) It exaggerates the effect of financial distress.

Question

Quizplus · Accepted Answer

B) The book value of assets, which is used in calculating shareholders' funds, can significantly differ from their current market or sale value, affecting the accuracy of the capital gearing ratio. C) The capital gearing ratio can theoretically range from zero (no debt) to very high values (much more debt than equity), making it challenging to compare across different firms with varying capital structures.

What Are the Two Major Problems with Relying on the Measure