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IAI Actuarial Core Principles · Business Finance · Structure and methods of financing a company

A company has Rs 40 crore of equity and Rs 10 crore of long-term debt. Which of the following gives its debt-to-equity gearing ratio?

The debt-to-equity gearing ratio is 25%, found by dividing Rs 10 crore of debt by Rs 40 crore of equity. The 20% figure uses total capital as the base, which measures debt to capital employed, not debt to equity.

  1. A10 / 50 = 20%
  2. B10 / 40 = 25%Correct
  3. C40 / 10 = 400%
  4. D40 / 50 = 80%
  5. 50 / 40 = 125%

Explanation

Debt-to-equity gearing is debt divided by equity: 10/40 = 25%. The 20% figure is debt over total capital, a different gearing measure (debt-to-capital), so it is not the debt-to-equity ratio asked for.

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