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Hi Sir,
Hope you are well.
In BPP book, they wrote the formula for this as:
Financial gearing = Prior charge capital : Equity capital including reserves.But in the revision kit Q.177-178, the answers both used equity without reserves or retained earnings. Could you let me know which way is correct please?
Thank you so much,
If we are calculating the gearing using book values (from the SFOP) the equity is the share capital plus reserves.
If we are calculating it using market values (as is more meaningful and more common in the exam), then we do not add reserves.
It is because the most obvious reason for the market value being higher than the nominal value is because the company has made profits. The market value effectively already includes the reserves.
I do explain this in my free lectures!!
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