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Example 2 Chapter 13 OT Notes – Total gearing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Example 2 Chapter 13 OT Notes – Total gearing

  • This topic has 3 replies, 2 voices, and was last updated 13 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • November 19, 2011 at 10:06 am #50568
    lunix
    Member
    • Topics: 12
    • Replies: 51
    • ☆☆

    I have a question regarding example 2 of Chapter 13 ‘Capital Structure and Finance Costs’.

    In part a) the debt is divided by the total of share capital + reserves + debentures.

    However in part b) the debt is only divided by the total of share capital + debentures.

    What happened with reserves?
    Are they supposed to be in part b) as well, or should they be removed from part a)?

    Your help will be much appreciated.

    November 19, 2011 at 10:10 pm #89950
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    In part (a) the gearing is calculated using balance sheet values, and on the balance sheet the total owing to shareholders is the share capital plus the reserves.

    However in part (b) the gearing is calculated using market values. One of the main reasons that the market value of the shares will be more than the nominal value (the share capital) is because of the retained earnings (the reserves) and so the market value already takes account of the reserves and so you do not add them again.

    November 19, 2011 at 10:29 pm #89951
    lunix
    Member
    • Topics: 12
    • Replies: 51
    • ☆☆

    Thank you very much sir for quick and easy to understand answer.

    November 27, 2011 at 4:55 pm #89952
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome.

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