ACCA Applied Knowledge · Financial Accounting · Analysis of financial statements
Zeta Co has equity of $600,000 (including share capital and reserves) and 8% loan notes of $200,000. There is no preference share capital. Using the formula debt / equity, what is the gearing ratio?
Gearing on a debt to equity basis is 200,000 divided by 600,000, which equals 33.3%. The 25% figure results from using total capital employed as the denominator, which is a different formula than the one specified in the question.
- A25.0%
- B33.3%Correct
- C75.0%
- D300.0%
Explanation
Debt / equity = 200,000 / 600,000 = 33.3%. The 25.0% figure uses debt / (debt + equity) = 200,000 / 800,000, which is a different formula from the one stated. The 75.0% and 300.0% figures come from inverting or misusing the figures.
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