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Hi Mike, I have question relating gearing ratio.
The question has been taken from Bpp test bank page number 75
Statements of financial position at 31 March
20X0
Equity and liability
Equity shares-5000
RE-2250Non-current Liability
5%loan notes-200020X1
Equity and liability
Equity-5000
RE-4500
Non-current liability
5%loan notes-2000
8%loan notes-7000In the calculation we usually solve it in the following way
20X0
2000(5% loan note)/2000(5%loan note)+(5000Equity+2250RE)*100%=21.62(22)
20X1
9000/(5000equity+4500RE)+9000(together with 5% and 8% loan note)=48.64Formula, Non-current liability/shareholder’s equity+reserve +non-current liability
In the Bpp answer they calculated it in the following way
20×1
9000/9500*100=94.7%
20×0
2000/7250*100=27.6
Why Bpp has not added non current liability over shareholder’s equity and reserve?because non-current liability has to be added.Did they make wrong calculation?If you look on page 115 of the course notes, you’ll see that, under the heading “gearing”, there are two ways of expressing this ratio
First is where interest bearing net debt is excluded from the denominator and second is where interest bearing net debt is included within the denominator
The first is alternatively titled the “debt ratio” and the second has the alternative title “debt to equity ratio”
This is a quote from the article https://www.investopedia.com/ask/answers/121614/what-difference-between-gearing-ratio-and-debttoequity-ratio.asp
“Different variations of the debt to equity ratio exist …”
Make what you can of that!
OK
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