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Hi
In the Chapter 15 notes the formula is:
Gearing = Long term liabilities/ Shareholders’ funds %
In the current textbook that I have, it is:
Debt/Equity and there is Operating Gearing of Contribution/PBIT
Please can you clarify?
If you watch the lecture I make two things very clear:
One is that financial gearing can be measured either as debt/equity, or as debt/(debt + equity). Obviously they give different answers, but the examiner always specifies how he wants it measure (when it is asked) and it could be either.
The second is that there is no standard measure of operating gearing – the only you quote is fine, but it is not the only one. Far more important in the exam is to be able to explain what operating gearing is, and why it increases risk.
I watched the lecture some time a go while going through the notes but at present I am just going through the notes on their own. Thanks, I will go over this again.
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