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Revenue $500,000
Gross profit $120,000
Operating profit $50,000
Loan (8% per year) $60,000
Asset turnover 4Sir we have to find gearing ratio, and the formula is long term debt/ long term debt + equity (125,000 capital employed)
Why does book provides 2 answer, the one done by the formula i provided gives 32.43% but they’ve done without adding long term debt in denominator, which gives 48%, if it would be a little difference wouldn’t matter but it’s nearly 16%, could you please tell me if doing it the either way matters? Or both answers are correct?
Also sir we have to find interest cover, as it says loan is 8% per year so i figured out 8% per year by adjusting it from operating profit which gives 625,000 and then dividing it by 60,000 which is finance cost (loan) answer is 10.42% correct sir?
As I explain in my free lectures, gearing can be measured in either of the two ways that you state.
Obviously they hive completely different answers, but when comparing two years then as long as the same way is done for each of the years then it is possible to comment on whether the gearing has increased or decreased.
In the exam, questions will either tell you how the gearing is to be measured or otherwise it will be obvious from the choices provided.
(And thank you for the wishes 🙂 )
Your welcome sir ^-^, and thankyou. Also sir did i measure interest cover correctly? Answer is 10.42%
I have no idea where you got 625,000 from.
The operating profit is the profit before interest and therefore the interest cover is 50,000 / (8% x 60,000) = 10.42 (but it is not a %).
Sorry sir for my foolishness, but even in the book it’s done like that, i don’t know sometimes kaplan kitt makes a mess, that 625,000 i got from dividing 50,000/8%, operating profit by 8% because it says loan per year
I have no idea why Kaplan should have done it like that!!
Anyway I hope my answer was clear.
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