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The examiner does write that he has calculated it as long-term debt / equity. However, as he also writes (in italics below the answer), you could calculate it as long-term debt / (debt + equity), which is also a valid way of measuring gearing.
So using the measure that he has used, the current gearing is 140,000 / 171,000 = 81.9%
Its the same approach for each proposal.Hi John,
In this particular question of Ennea, I cannot get how they get the current asset value and retained earning value for 3 proposals.
Can kindly explain me.
Thanks a lot.
You need to look at the workings for the current earnings and the earnings for the new proposals.
The current retained earnings will include the current earnings for this year of 23,000, so for the proposals you need to subtract the 23,000 and instead add on the forecast earnings for the year.
Hi John, I have some questions on this as well.
For proposal 1 – the interest payable is 20m x 0.06 x 0.8 = 0.96
When I look of the double entry
Interest Expense 1.2m
Interest Payable/Cash 1.2mTax Expense 0.24m
Tax Payable/Cash 0.24mSo the shouldn’t interest payable be 20m x 0.06 x 1.2 = 1.44 instead of 0.96?
I don’t know whats wrong with my thinking..
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