Page 535 - Microsoft Word - 00 ACCA F9 IWB prelims 2017.docx
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Business valuations and market efficiency
Question 2
Financial gearing
A company has the following long-term sources of finance:
Ordinary shares: 3 million, nominal value $1 each, market value $1.50 each.
Reserves: $0.34 million.
Preference shares: 0.6 million, nominal value $0.50 each, market value $0.85
each
8% irredeemable debt: $1.5 million nominal value, market value $110
Current liabilities: $0.5m
Calculate the capital and equity gearing using both book and market values.
Book values:
Ordinary shares = 3m × $1 = $3m
Reserves = $0.34m
Preference shares = 0.6m × $0.50 = $0.3m
Irredeemable debt = $1.5m
Total equity = $3m + $0.34m = $3.34m
Total long-term debt = $0.3m + $1.5m = $1.8m
Capital gearing = $1.8m/($1.8m + $3.34m) = 0.35 or 35%
Equity gearing = $1.8m/$3.34m = 0.54 or 54%
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