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Equity Gearing

+2 Votes
Equity Gearing

Hi,

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!

Thank you.
Hiri

May 10th 2015 AN ACCA USER 360 Points

6 Replies

+1 Vote

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 .

May 12th 2015 AN ACCA USER 220 Points
+1 Vote

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.

May 14th 2015 AN ACCA USER 240 Points
0 Votes
Hi James,
Thankyou very much for your help.
The question is to calculate "Prior Charge Capital/Equity" which means Equity Gearing.
Duc has also helping me out yesterday. I agree with him or her entirely after checked with some study materials.
May 15th 2015 AN ACCA USER 360 Points
0 Votes
Hi Duc,
Thank you very much for your help.
I agree with you entirely. The question I should have focused on was  "Market Value based gearing"!!
May 15th 2015 AN ACCA USER 360 Points
0 Votes
to calculate gearing on book value basis, use reserves. if you are asked to calculate on market value basis, then don't take reserves( just find the market value of shares)
May 18th 2015 AN ACCA USER 290 Points
0 Votes

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.

May 18th 2015 AN ACCA USER 240 Points
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