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Chapter 1

Example 6

Angela Co is a listed company. It has 1 million $0.25 par value ordinary shares
in issue, and $100,000 worth of $100 par value bonds. The shares were
originally issued at a premium of $0.05 per share, and the bonds were issued
at a 10% discount to par value. The shares and the bonds are trading at $1.22
and $102 respectively.

What is the gearing ratio of Angela Co, calculated as [debt / (debt +
equity)] and using market values?

A 7.7%

B 8.4%

C 23.1%

D 28.6%

Solution

The answer is (A).

Market value of debt is $100,000 × (102/100) = $102,000

Market value of equity = 1 million × $1.22 = $1,220,000

Therefore, gearing is [102/(102 + 1,220)] = 7.7%

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