Which of the following is a method to reduce gearing?

• A. Increase ordinary shares to raise shareholders' equity.
• B. Increase long-term debt to finance growth.
• C. Pay higher dividends to attract investors.
• D. Sell off key assets to cover short-term expenses.

Answer: (A)

Gearing measures how much of a company is funded by debt compared with equity—the debt-to-equity relationship. A key way to reduce gearing is to increase the equity base without raising debt, because the ratio of debt to equity falls as equity rises.

Issuing ordinary shares to raise shareholders’ equity directly enlarges the equity portion of the balance sheet. With debt unchanged, the debt-to-equity ratio drops, lowering gearing and the associated financial risk.

The other options either boost debt, reduce equity, or use assets to cover expenses, which doesn’t improve the debt-to-equity balance and can actually raise gearing or have no effect on it.