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p4 O.T notes chaper 16 eg 3

This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.

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June 5, 2018 at 7:54 pm #456619
Anonymous
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Good day, I’m just wondering how the figure for Value of equity and Value of Debt was reached in example 3 chapter 16.
it say gearing ratio is 0.2. I thought this essentially meant that you could use equity as 80 and debt as 20. but the example stipulates that those values are 100 and 20 respectively.
I think I am missing something
Thank you
June 6, 2018 at 7:42 am #456748
John Moffat
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The example says that the ratio of debt to equity is 0.2.
So the debt/equity must equal 0.2. i.e. for every 100 equity, the debt must be 0.2 x 100 = 20.
(If you use 80 and 20, then the ratio is 20/80 which does not equal 0.2 🙂 )
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