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Hello Sir
My doubt is if asked to calculate the Financial gearing of the company using book values, should we include the reserves with the equity?
Ordniary shares 20m
Reserves 5mDebt 2m
Gearing = 2/20+5
Am I correct?
Thank you
I explain this in my lectures on gearing (my lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well).
If you are using book values, the the value of the equity is the share capital plus reserves, so what you have written is correct.
If, as is more common and more relevant, you are using market values, then the market value of the equity effectively already includes reserves and so you do not add them on again.
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