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Sir wanted to ask about these two
Firstly financial risk gearing ratio
In your notes its mentioned 2 ways of calculating it
1. Debt borrowing + prefernce share capital / ordainary share capital+ reserves
2 debt borrowing + prefernce share cpaital / total long term capital ( debt + equity )
In Bpp q179 mcq
It is asked what is market value based gearing of company defined as prior charge capital / equity
They didnt add the reserves in ordainary share capital it was simply
Bonds + bank loans + pref shares / ord shares
No reserves were added
Similarly in q178 mcq
Retained earnings were given
And they asked to find financial gearing ratio
Through this formula
(Debt / debt / equity )
Here they didnt add the retained earnings
So this means that equity only means ordinary share capital ?
Secondly wanted to ask about business risk
In section C q 212 bar co it ask about business risk
The answers show that business risk can be measured by the operational gearing ratio
Now in your notes it says that business risk is of two types systematic risk and unsystematic
Unsystematic can be removed and systematic risk in the beta
These things contradict ?In future please do not ask about separate topics in the same post but create separate posts.
As far as your first question is concerned, I make it very clear in my free lectures that when using market values to calculate the gearing ratio we do not include reserves. The most obvious reason for the market value being higher than the nominal value is that the company has been making profits – the market value effectively already includes the retained earnings.
For your second question, there is no contradiction. Have you watched my free lectures on both operating/business risk and on financial risk?
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