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The lesson uses a specific term, drawn from UK usage, for the practice of using borrowed funds or fixed-cost funds in the capital structure. Which term does the lesson use, and what is the lesson's observation about this practice in good times?
Answer & Solution
Correct answer: C.
1. The lesson uses the UK term "gearing" interchangeably with the US term "leverage".
2. Financial gearing means using borrowed or fixed-cost funds in the capital structure.
3. High gearing increases EPS when EBIT is rising.
4. The lesson notes the converse: EPS of a highly-geared company falls faster in bad times.
5. The other terms misuse standard finance vocabulary.
_Source: ICSI CS Executive Paper 8 (Financial and Strategic Management) — Lesson 1: Nature, Significance and Scope of Financial Management, pp. 6-20._
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