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A- V) USE CACULATION WHERE EQUITY FINANACE OR DEBT SHOULD BE USED?
to do so we have been given the industry gearing ratio i.e ( book value of debt/ book value of equity )
please check the solution
DOUBT 1) when calculation book value of equity we have taken into account the nominal value of additional share issed but we haven’t taken into account the increase in profit due to invesment being made why is that so?( there is a 20% increase in profit due to investment)
We have no choice but to calculate the gearing immediately after the expansion.
In a years time the retained earnings may well increase, but that depends on how much profit is retained as opposed to being paid as dividend. We do not have that information.