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Using book values to calculate gearing

AABDULLAHI4y ago
Hi, A little bit confused about this subject. Should we include reserves in the equity when we are asked to calculate gearing using the book values? If the answer is yes,why? I read it somewhere or probably in your lectures sometimes back(it's been month of practice now!) that reserves/retained earnings are already captured in the share price and doesn't need to be included in the equity. Here if we are taking book values,I thought the nominal will suffice. Thanks, John.
John MoffatJohn MoffatTutor4y ago#1
If using book values, then the value of equity is the share capital plus the reserves (as in financial accounting). If using market values, then we just use the share price because it effectively includes the reserves (the most obvious reason for the share price being higher than the nominal value is because the company has been retaining profits).
AABDULLAHI4y ago#2
Got it. thanks,sir.
John MoffatJohn MoffatTutor4y ago#3
You are welcome.
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