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Sir when a rights issue takes place and we calculate the new gearing ratio,do we use the nominal rate of the rights issue as equity or do we take its face value ?(in the qs the gearing ratio is calculated with book/nominal values) but after the rights issue they have taken the book value of debt /book value of equity+market value of rights issue
Pls helpThe gearing ratio can be calculated using either book values (balance sheet values) or market values. Using market values is more sensible if you have the information, but usually you are not given market values and so you use book values.
The questions you are referring to use book values (balance sheet values). The have not used the market value of the rights issue. What is happening is that when you have an issue of shares, share capital increases by the nominal value and any extra paid over the nominal value goes to the share premium account. The total book value of equity is everything in the balance sheet – share capital + reserves (which include share premium) and so the book value increases by the total amount of cash received from the issue of shares.
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