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Can u please explain how do historical cost accounting overstate gearing during a period of rising prices.
Gearing is computed as Loan capital / shareholders’ Funds
And shareholders’ funds equate to Net Assets
And in times of rising prices, net assets that valued at historic cost are worth less than their replacement values
So loan capital / net assets valued at yesterday’s prices will result in higher gearing than loan capital / net assets valued at today’s prices
OK?
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