Which of the following is a direct financial benefit of low gearing?

• A. Lower interest repayments do not affect profitability.
• B. It reduces the need to manage cash flow.
• C. It ensures annual tax savings.
• D. It makes it easier to raise additional loan finance.

Answer: (D)

Low gearing reduces financial risk and makes the business appear safer to lenders. Because debt is a smaller part of the capital structure, lenders are more willing to provide additional loan finance, so raising new debt becomes easier. This directly affects the cost and availability of funding, helping the company finance growth or manage downturns.

Lower interest repayments would actually boost profitability by reducing finance costs, so saying they do not affect profitability isn’t correct. Cash flow management remains important even with low gearing, so it isn’t the primary direct benefit. Tax savings come from the tax-deductibility of interest, so higher debt increases the tax shield; low gearing does not guarantee annual tax savings.