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IAI Actuarial Core Principles · Business Finance · Interpreting company accounting information

Extracts from the balance sheet of Kaveri Auto Ltd at 31 March: equity share capital ₹40 crore; reserves ₹20 crore; 12% preference shares ₹10 crore (treated as debt-like); long-term loans ₹30 crore; short-term bank overdraft ₹10 crore. Gearing is defined as (long-term debt plus preference shares) divided by (equity plus reserves plus long-term debt plus preference shares). The overdraft is excluded. What is the gearing ratio?

Gearing is 40%. Long-term loans of ₹30 crore plus preference shares of ₹10 crore give ₹40 crore of debt-like capital, and total long-term capital is ₹100 crore including equity of ₹60 crore. The overdraft is excluded by the stated definition, so 40 divided by 100 is 40%.

  1. A28.6%
  2. B40.0%Correct
  3. C50.0%
  4. D66.7%
  5. 57.1%

Explanation

Numerator = 30 + 10 = 40. Denominator = 40 + 20 + 30 + 10 = 100. Ratio = 40%. Including the overdraft gives 50/110 = 45.5% in the numerator-and-denominator version; 66.7% is debt over equity (40/60); 28.6% omits preference shares from the numerator (30/105 style error).

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