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Hi sir, I would like to about capital structure.
In general, we talk about capital structure, we will use debt to equity ratio to measure it right?
How about is there any possible that using debt ratio to measure the capital structure? If there is, so why it is?
Thanks
You can either use the ratio of long-term debt to equity, or alternatively the ratio of long-term debt to (equity plus debt).
Obviously they give different answers, but the ratio on its own does not mean much – it is relevant when comparing two years (or two companies) and as long as you use the same measure both times, the discussion will be the same.
Because there are the two ways, if the examiner wants you to state the ratios (as opposed to just discussing the gearing) then he says in the question which way he wants it to be measured.
I do explain this in my free lectures (and as to whether to use book values (from the SOFP) or market values). The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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