Performance and ratios — OpenTuition Forums

SSukhdev9y ago

Hi I am o.k with the general workings of the different ratios but seem to be struggling with questions where if say gearing has reduced then what types of movement could be a reason. I have seen an example where gearing reduced and one of the reasons was issue of convertible bonds? Is this because the liability element would be higher than equity element Therefore would the gearing increase? As liability element top part of fraction is higher but in question this is one of the reasons for explaining why gearing has lowered? Please help.

P2-D2Tutor9y ago#1

Hi, I think you're getting confused. If we issue convertible debt then the debt figure increases and therefore gearing increases. You'd need to show me the example that you are referring to if you want me to explain it. Thanks

SSukhdev9y ago#2

Hi The question is that gearing reduced from 29 to 19.which if following would NOT be a reason, 1- plant machinery revalued 2- company issued 10m convertible bonds before yr end 3- company undertakes 2 for 1 rights issue 4- company began new equity settled share based payments

P2-D2Tutor9y ago#3

Hi, If gearing reduces then either the debt has reduced or equity increased. 1. Equity increases 2. Debt increases 3. Equity increases 4. Equity increases Therefore 2 is the answer as it would not cause gearing to decrease but would cause gearing to increase. Thanks

SSukhdev9y ago#4

O.k thanks

SSukhdev9y ago#5

Hi Sorry just noticed that option 4 - you mention gearing increases but this is answered as not affecting gearing because the profits will reduce and the equity increases therefore this has been highlited as another of the reasons for gearing not to reduce, can you please check and confirm?

P2-D2Tutor9y ago#6

No, I said equity increases (and therefore gearing decreases). I did not say gearing increases. Thanks

SSukhdev9y ago#7

Sorry my error

SSukhdev9y ago#8

Hi In relation to no.4 am I correct in saying that if share based payments are completed then this would NOT cause gearing to reduce as profits will be reduced and equity increases therefore this is another situation which would not cause gearing to reduce?

P2-D2Tutor9y ago#9

Hi, Once the share based payments reach the vesting date and are subsequently exercised then share capital and share premium would be created within equity on issue of the shares. So there is unlikely to be any impact on equity as it is just a switch in the equity balances from shares to be issued to share capital and share premium. The gearing is therefore likely to remain the same. Thanks

SSukhdev9y ago#10

Thanks

CCatherine9y ago#11

Hello, from where did you get this question ?

CCatherine9y ago#12

CCatherine9y ago#13

@sguhman said: Hi The question is that gearing reduced from 29 to 19.which if following would NOT be a reason, 1- plant machinery revalued 2- company issued 10m convertible bonds before yr end 3- company undertakes 2 for 1 rights issue 4- company began new equity settled share based payments

From where did you get this question?

SSukhdev9y ago#14

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