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Hi Sir John,
Under number 178 and 181 which has the same problem, May I be clarified why the solution did not consider the Reserves of 20,000 in computing the market value based gearing as I understand that financial gearing is debt borrowing plus preferred shares/ ordinary shares plus reserves?
The solution only considered the ordinary shares.
Thanks, then!
You have not said which MCQ bank you are referring to!!
However, as I do explain in my free lectures, the market value of shares effectively already includes the reserves – we do not add them on again. (The fact that there are reserves due to having made profits is the most obvious reason for the market value being higher than the nominal value of the equity).
Please do watch the free lectures.
Hi Sir John it’s from the BPP. Sorry for missing this out but yes! I already understand. As long as its market value as the basis, reserves/retained earnings are already included so no need to include them again.
Thank you
Another concern on number 180 states all else being equal, a poor set of results and lower dividends that are not as bad as shareholders were expecting would probably have an impact on P/E ratio (increase) and dividend yield ( decrease)?
Sir, can I get a clearer view?
By the way I got all these problems under BPP revision kit.
Share prices are based on what shareholders expect to happen in the future.
They were expecting poor results. so the share price would have been low. The results were better than they were expecting so then the share price will increase. A higher share price will mean a higher PE and a lower dividend yield.
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