Prior charge capital/equity

My dear tutor, Hope you had a wonderful weekend :) I would like to ask why in the question 17 of Dec exam 2014, the answer did not include reserve as part of equity in the gearing ratio calculation? Furthermore, their answer also did not include bank overdraft as part of prior charge capital ( but I remember seeing your answer on another student post that the prior charge capital consist of bonds, preference shares, bank loans and bank overdraft) Kindly see below answer I copied from Accra website. Question 17 The following are extracts from the financial position statement of a company: Equity Ordinary shares 8,000 Reserves 20,000 Non-current liabilities Bonds 4,000 Bank loans 6,200 Preference shares 2,000 Current liabilities Overdraft 1,000 Trade payables 1,500 The ordinary shares have a nominal value of 50 cents per share and are trading at $5.00 per share. The preference shares have a nominal value of $1.00 per share and are trading at 80 cents per share. The bonds have a nominal value of $100 and are trading at $105 per bond. What is the market value based gearing of the company, defined as prior charge capital/equity? A 15.0% B 13.0% C 11.8% D 7.3% The correct answer is A, that gearing is 15%. Many candidates chose answers B, C or D rather than answer A. In order to calculate the correct answer to this question, the definition of gearing given in the question must be used, market values must be calculated (where possible), and the concept of prior charge capital must be understood. In this case, the prior charge capital consists of bonds, the long-term bank loan and preference shares. Preference shares are included with prior charge capital, even though they pay a dividend rather than paying interest. The correct answer A is calculated as follows: Market value of equity = $8m x ($5.00/$0.5) = $80 million Market value of bonds = $4m x ($105/$100) = $4.2 million Market value of preference shares = $2m x ($0.80/$1.00) = $1.6m Prior charge capital = $4.2m + $6.2m + $1.6m = $12 million Market value based gearing = 100 x ($12m/$80m) = 15.0% If the definition of gearing given in the question is not used, but instead a candidate defines gearing as prior charge capital/(equity plus prior charge capital), sometimes called capital gearing, then incorrect answer B is obtained: Gearing = 100 x 12.0m/($80m + $12m) = 13.0% If the market value of equity wrongly includes reserves and the market value of preference shares, then incorrect answer C is obtained: Gearing = 100 x 12.0m/($80m + $20.0m + $1.6m) = 11.8% If the bank loan is wrongly omitted from the calculation of prior charge capital, incorrect answer D is obtained: Gearing = 100 x ($4.2m + $1.6m)/$80m = 7.3%