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Dear Mr. Tutor,
Could you clarify the following?
In BPP Study book they provide a formula for operational gearing as Contribution/ PBIT
In June 2013 Q1 an Examiner mentions a formula for the same ratio as Fixed cost/Total cost
Is there an uniform formula to be used in the exam?
Many thanks in advance!!!
It’s not uniform. I find the second one much easier to interpret.
I suggest you stick with the examiner’s version, though either would be acceptable in the exam.
Respected Ken,
In bpp kit mcq number 164 asks to calculate “financial gearing” using market values (debt/debt+equity).
Information for equity (in The denominator) an extract of statement of financial position has retained earnings too but have not been included in the calculation. Isn’t retained earnings part of equity?
A response shall be very helpful.If you have to use the SOFP for gearing, then equity consists of share capital plus reserves/retained profit.
If you are using market values, then you just need the market value of the shares as this should reflect the retained earnings (as well future earning potential).
Thank you so much for a response. Can you please tell me if i am supposed to use market value and the sofp also had share premium will that have been included in equity or not? As when not using market values the equity includes share premium .
It depends what you are doing.
EVA uses book value (as adjusted) and would include share premium when you are making the notional charge for the use of capital.
WACC calculations use market values.
I am sorry, i am doing f9 paper and i just noticed that this forum relates to p5. I am actually new to this website and so not good in using it. As such there’s nothing named eva in f9. And i have exam after two weeks so don’t want to confuse my poor self 🙁 i just need to know that in calculating gearing for f9 paper (debt/equity) when it’s asked to calculate using market values will i also include premium in the numerator (given in sofp) or the market share price will be representative of all?
Oh ok will just take the market share price x no. Of total share = equity as denominator ! Thank you so much sir for responding to a dumb like me 🙂 stay blessed 🙂
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