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BPP 17.8
What is the capital gearing ratio, expressed as a percentage to one decimal place? (Use the formula D / (D+E).)Equity and Liabilities
Capital and reverse 585,000
Long term liabilities (long term loan) 670,000
Current liabilities (payables only) 84,000
—–
1,339,000My approach:
Gearing ratio
= non-current liabilities / capital and reverse
= 670,000 / 585,000 x 100
= 115.5%Answer:
670,000 / (670,000+585,000) = 53.4%Why does “capital and reverse” includes “non-current liabilities”?
In OpenTuition Chapter 28, example 1, we calculated gearing for
2007: 500/2190×100 = 22.8%
2006: 400/1401×100 = 28.6%
and we did not include “non-current liabilities” in the “capital and reverse”. Following BPP answer’s logic, this should have been
2007: 500/(2190+500)x100
2006: 400/(1401+400)x100Am I completely mixing something up? Please correct me… Thanks.
There are two ways of calculating the gearing ratio. you can take long term debt/equity or alternatively long term debt/ (equity plus long term debt). They obviously give different answers, but both are valid.
This question specifically tells you to calculate it using the second alternative, which is why the answer is as shown in the BPP book.Equity is always measured as being capital plus reserves. It never includes long-term debt (which is D in the formula).
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