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Hello Sir, should i use debt/share+reserve, or debt/share, one question in BBP asked to calculate gearing, the answer like that debt/share without reserve, is it normal may to calculate gearing without reserve? is it possible to plus reserve by specific mentioning in question?
many thanksIf you are asked to calculate the gearing based on book values (which is not common) then you use debt / share capital + reserves.
If you are asked to calculate the gearing based on market values (which is what we always do unless specifically told differently) then it is debt / MV of shares.
(The reason is that the most obvious reason that the MV of shares is higher than the nominal value is because of retained earnings (i.e. reserves)).
Also, gearing can be measured either as debt/equity or as debt/(equity plus debt). The examiner almost always specified which way he wants – if he does not then either is acceptable.
I do explain all of this in my free lectures – they are a complete free course for F9 and cover everything needed to be able to pass the exam well.
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