I would appreciat it if anyone could explain about Equity Gearing.
I am struggling to understand what situation "Reserve should be included with Ordinary share capital?
Formula shows Equity Gearing is Preference share capital + Long-term debt / Ordinary share capital + reserve.
I have tried to answer several question papers. (ex. Q17-Section A in Past exam Dec 2014), I have included reserve for this question because as the financial statement shows "Reserves as $20k" but answer does not incude the reserve.
I may have misunderstood the question...
I hope someone have a good solution about this!
I couldn't find the q you were refering to but for gearing ratio there is three different way to calculate (see bpp ch14 example) so its possible the answer is not wrong but different
Secondly check the q does it ask specifically ask for just eduity debt ratio or gearing ratio .
Sometimes the study text is not clear. This formula uses BOOK VALUE showed on statement. However, if the question required the MARKET VALUE (which is normally recommended), then this formula is USELESS. The Equity value is the market capitalization only (=no of shares x market price), any reserves have been reflected in market price.
you can cal for gearing using three method, and will get three different anwers and also try understand the question if you not ask to use market value fot it. Also dont forget to add short term debt to your debt equity say o/d.