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Dear Sir,
Q177: ELW’s Financial Gearing. The formula is Debt/Debt+Equity. But Why the we don’t add the Resrves 400 for the final equity figure? Reserves should be part of Equity?
The answers says 625/625+550, but I think it should be 625/625+550+400.Similar issues also shows in Q178. I also included the Reserves figure to the Equity figure, but seems wrong.
When using book values to calculate gearing, then equity is calculated as the share capital plus the reserves.
However, when using market values, we do not add on the reserves. They are effectively included in the market value (the most obvious reason for the market value being higher than the nominal value is because the company has been retaining profits i.e. has reserves).
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