ACCA Applied Knowledge · Financial Accounting · Capital structure and finance costs
Pellam Co has the following extracts: profit before interest and tax $360,000; finance costs $40,000; equity $900,000; non-current liabilities (all loan notes) $300,000. What is the gearing ratio calculated as debt divided by debt plus equity?
Gearing is 25%. Debt of $300,000 is divided by total capital employed of $1,200,000, being debt plus equity. Dividing debt by equity alone would give 33%, which is a different ratio from the one requested.
- A25%Correct
- B33%
- C20%
- D44%
Explanation
Debt is $300,000 and debt plus equity is 300,000 + 900,000 = $1,200,000. Gearing is 300/1,200 = 25%. 33% results from dividing debt by equity only, which is a different measure. The interest figure is not needed.
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