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Hi sir, do we include bank loans in gearing calculations? If so, will the value be the same for both the book value and market value calculations?
Yes, we do include bank loans because they classed as non-current liabilities and are long-term borrowings. And yes, the market value of a bank loan is the same as the book value (because bank loans are not traded and so do not have a market value as such. The amount of the loan is what is needed and that will be the amount stated on the SOFO.)
Bank overdrafts are not included because they are repayable on demand and are always classed as current liabilities. The only time there may be an argument for including bank overdrafts in the calculation of gearing would be if the question made it clear that the overdraft was intended to be continued in the long-term.
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