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How to calculate the gearing – book value for year 1 (Ans: 50%) and year 2 (Ans: 34.6%)?
I am using the formula [ Debt / (Debt + Equity) ].
By using this formula, I am able to get the answer for year 3 and 4 but not year 1 and 2.Gearing can be calculated either as debt/(debt+equity) or as debt/equity.
Obviously they give different answers, but either way is accepted (unless the examiner specifies which way he wants it to be calculated).The answer to this example has calculated as debt/equity for all four years.
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