Solution to Debt and Equity Problem (1 Viewer)

[sirius_g]

The reason why there are two different answers to this question is because two different methods to calculate the gearing ratio were taught. The longman ( skyes) textbook features the debt to equity ratio as Long-term debt/ owner's (LT/OE) however every other textbook such as Excel and Chapman feature the ratio as Total Liabilities/ Owner's Equity(TL/OE).

The first method give 0.75/1 or below industry average
while the second method gives 3.1 or above industry average

Therefore unfortunately business studies students have been taught a wrong method ( which one I cannot say, I don't know if our syllabus specifies how to calculate the gearing ratio) and this is why people answers differ. In my opinion, this question should be ruled invalid by BOS , as the fact that their are two different methods ( giving different answers) have been taught.

sirius

 

[shazabdazla]

from smh business studies 2003:

debt to equity ratio = (CL + NCL) divided by OE

the smh states this is the correct equation. i have never seen the equation to be that as in the longman textbook anywhere else, and i have seen about 4 textbooks.

i agree, the ratio should be specified by the bos otherwise the question is invalid, especially where answers may differ.

SILLY BOS!

 

[Truly_bored]

We had a similar question...in our trials..to calculate solvency and our teacher said that there are different ratios and that u can use any of them....me and my friends were totally confused...but i believe that to calculate the debt to equity ratio u hab to use long term debt/owner's equity.....

i think that in any situation the debt to equity ratio is the best ratio to use for calculating the solvency of the business

 

[sirius_g]

Macquarie

The long-term debt to equity ratio is also featured in the recent Macquarie Business Studies Textbook.

Sirius