# Capital Structure and Financial Ratios Financial Gearing (part a)

 View all ACCA Paper F9 lectures >> This ACCA F9 lecture is based on OpenTuition course notes, view or download lecture notes here>>

1. says

Hi Sir
From the lecture, there are two ways of looking at gearing, the market value and balance sheet value. Which of this shows the real gearing of the company

• says

Market values, because the book values in the Statement of financial position (especially that of equity) do not generally provide a true measure of the values in the business.

2. 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

• 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

• 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.

3. Example 2 share capital 10000
So total shares 10000/10c =1000
1000*2.20
is this correct?

• 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

• says

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4. 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?

• says

Hi Sir John
Can u pls tell whether we take reserves like retained earnings or revaluation reserve as equity in the calculations?
Thanks

• 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).

• 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.

• says

They are working perfectly fine. I just wish the people here would stop complaining for one second about the free service they are getting.

5. 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.

6. 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.

• says

I have the same question… where is the discussion on financial and operational gearing..? thank you

• says

There is a little bit from about 15 minutes onwards. I will record a bit more when I have the time, but if you look at the example in the course notes then it should make sense without a lecture.

7. says

Most probably, its your internet connection. It works fine because these lectures are around 30MB only

8. 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 ??