Skip to main content
–
Gearing is the relationship between debt and total equity included in the capital structure of a firm. The two items are different due to their characteristics. Debt is the capital amount that must be repaid and for which a certain amount, in the form of interest, must be paid at certain dates. Equity, on the other hand, is not usually recoverable from the company during periods of liquidation and does not always receive constant steady income.
Shares (both preference and common stock) are part of equity. Debt instruments include notes payable, bonds etc. Debt instruments must always been repaid in times of liquidation.
To assess the gearing, of a company, the total debt is divided by the total equity of the firm. For example, assume a firm has $10,000 5% Bonds selling at $11,000 (110%) and $5 par value common shares 100,000 units selling at $29, $2 par value 10,000 preference shares selling at $11. Also the firm had and Earnings before interest and taxes (EBIT) of $100,000.
The debt-to-equity gearing ratio, of the company, will be determinable as below:
SEE ATTACHED
In assessing debt-to-equity ratio the optimal value should be below at least 50%. Any value, above 50% means that the firm is heavily geared and much of its income would be paid to the external debtors. It also can trigger additional charges from the shareholders in the form of increased rate of return.
Another gearing measure is the times interest earned ratio. It measures the number of times income is covering the interest payment. Higher values, for the ratio, are desirable. There is usually no target ratio value.

Comments

Post a Comment

Popular posts from this blog

Should pit bull terriers be banned in my community

 Discussion Forum: Counterarguments (Should pit bull terriers be banned in my community) You created a question about the topic for your W6 Rough Draft. For this discussion, you will give an answer to that question in the form of a thesis statement. "Dieting Makes People Fat" Main Post: Share your thesis statement with your classmates. Please note: As with last week’s discussion, nothing here is set in stone. Be open to changing everything about your topic, including your position and audience, as you research it and get feedback from your classmates. Topic + Position/Purpose + Supporting Points =Thesis Statement Example: Suppose the question you posed in the Week 5 discussion was something like, “Should pit bull terriers be banned in my community?” After doing some preliminary research, you have concluded that pit bulls, if raised properly, are no more dangerous than other breeds of dogs. Your thesis statement can be something like, “Pitbulls should not be banned
Post a Comment
Read more

Controversy Associated With Dissociative Disorders

 Assignment: Controversy Associated With Dissociative Disorders The  DSM-5-TR  is a diagnostic tool. It has evolved over the decades, as have the classifications and criteria within its pages. It is used not just for diagnosis, however, but also for billing, access to services, and legal cases. Not all practitioners are in agreement with the content and structure of the  DSM-5-TR , and dissociative disorders are one such area. These disorders can be difficult to distinguish and diagnose. There is also controversy in the field over the legitimacy of certain dissociative disorders, such as dissociative identity disorder, which was formerly called multiple personality disorder. In this Assignment, you will examine the controversy surrounding dissociative disorders. You will also explore clinical, ethical, and legal considerations pertinent to working with patients with these disorders. Photo Credit: Getty Images/Wavebreak Media To Prepare · Review this week’s Learning
Post a Comment
Read more

CYBER SECURITY and how it can impact today's healthcare system and the future

 Start by reading and following these instructions: Create your Assignment submission and be sure to cite your sources, use APA style as required, and check your spelling. Assignment: Recommendations Document Due Week 6 (100 pts) Main Assignment Recommendations Document The 1250 to 1500-word deliverable for this week is an initial draft of your recommendations. Note that this is a working document and may be modified based on insights gained in module eight and your professor's feedback. This document should contain the following elements: Summary of your problem or opportunity definition A list of possible recommendation alternatives. In this section, you are not yet at the point of suggesting the best set of recommendations but you are trying to be creative and explore all the different ways that the problem or opportunity might best be addressed. The end result here will be a list of alternatives among which you will choose your final recom
Post a Comment
Read more