1. Profile photo of Michael says

    Hi John,

    Excellent lecture as per usual! I just have one question on Example 2 part (b): when calculating the Equity at market value, how come you don’t include Reserves? I’m a bit rusty on F3 :)

      • avatar says

        hello,john thank you very much for your lecture. but i m little bit confused about calculating gearing in a market value…why u did not add reserve in equity …please let me clear it.. thank you

      • Profile photo of John Moffat says

        One of the main reasons why the market value of equity is more than the original capital is because the business has been making profits and is therefore ‘bigger’.
        So the market value effectively already includes the reserves.

    • Profile photo of John Moffat says

      No – it is not correct.

      If share capital is $10,000 and they are $0.10 shares, then there are 10000/0.10 = 100,000 shares.
      If the market value is $2.20 per share, then the total market value is 100,000 x $2.20 = $220,000

  2. avatar says

    Master John, as far as I’m concerned, the figure of equity thas is used for the calculation of the financial leverage includes retained earnings as well. In example 2 of course, the BS couldn’t balance if there were retained earnings as well, so I guess Lavetal doesn’t have any.

    However, if there were retained earnings as well, should we include these in the “equity” figure?

      • Profile photo of John Moffat says

        There are two ways of looking at gearing depending on what information is available.

        The best way would be to use the market values of debt and of equity – if you have these then reserves are not relevant (because the market value is already taking these into account).

        If you do not have market values then it means we have to use balance sheet values. In this case you take the total shareholders funds (share capital plus all reserves).

      • Profile photo of Mahoysam says

        Perfect explanation Mr John, I wanted to ask about this point, I never knew that the MV takes into account the reserves, nice thing to learn.

  3. Profile photo of Saad Bin Aziz says

    Same question i had , but if you listen to this with full focus you will realize that john has indeed made operational gearing concept clear but has stated that he will not be doing numbers on it as perhaps there is no fixed way of doing so.
    Operational gearing , btw, is a measure of variable costs to fixed costs.Hope this helps a little.

  4. avatar says

    Where is the discussion bit for financial gearing and operating gearing.I recon it’s supposed to be at the beginning of this lecture, which might have been cut off. If that is not available, pls make that available with the old lectures to cover it a bit.

  5. avatar says

    can any tell me wat happens to video
    lecture all videos gettin to much time to download ..! ..its took me wait so long almost 1 hour to watch this video ..! :(:( olders videos are fine with me ..! any solutions ??

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