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The following is an extract of ELW’s statement of financial position:
Total assets 1000
$1 ord share cap 100
retained earnings 400
loan notes 500The ordinary shares are currently quoted at $5.5 and loan notes are trading at $125 per $100 nominal. What is ELW’s financial gearing ratio using market values? (debt/debt+equity)
Even though the formula says to use equity which would comprise of ordinary share capital and retained earnings given in the question why do we not take the retained earnings value? Is it because there is no market value for it? And the value given in the question is the book value for retained earnings?
Given that the figures are taken from the statement of financial position, they are the book values.
The market value of the shares effectively include the retained earnings – the most obvious reason for the market value being higher that the nominal value is because of the retained earnings.
I do explain this in my free lectures!!
which lecture is it could you please say? i must have listened to it but glossed over the part sorry…
It is the lectures on Chapter 13 of the free lecture notes (example 2).
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