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I have just been working through the revision lectures and came across a problem with the one on Modigliani and Miller which has highlighted a problem with wording.
In the answer to the example (in the booklet) 80% debt to equity has been translated as 80:20 whereas in the lecture it has been translated as 80:100
Are there any tips to wording in questions to look out for which will allow a correct interpretation.
I assumed debt to equity as percentages would add to 100% and whereas the lecture example would be classed as debt to debt/equity
Please advise, thanks
Gearing can be expressed in two ways – either debt to equity, or debt to total capital (debt + equity).
In these questions, the question would make it clear which definition is being used.
If it is 80% debt to equity, then it means that for every 100 equity there is 80 debt.
If it is 80% debt to (debt + equity) then it means that for every 100 total, there is 80 debt (and therefore 20 equity)
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