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Question on gearing forrmula

This topic has 2 replies, 3 voices, and was last updated 12 years ago by John Moffat.

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June 8, 2012 at 2:44 pm #53230
jm84
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I have some doubts based on the gearing formula.
If we calculate the gearing based on market value, for the ‘equity’ part, we should exclude reserves? (Eg: June 2009 Question 4 Debt/equity ratio)
So, if using book value, we should include the reserves into the equity?
Thanks.
June 8, 2012 at 4:28 pm #99747
Anonymous
Inactive
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it is because mv is based on whole of the equity portion.ie,share capital+reserves etc
June 10, 2012 at 9:04 am #99748
John Moffat
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If using book values then reserves are part of equity.
If using market values then you do not add the reserves (because one of the reasons the market value will be higher than the nominal value is because of the retained profits).
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