ExpertEasy2 marksMultiple Choice
ACCA · Question 35 · F. Performance measurement
A luxury hotel chain has Long-term Debt of $4,000,000 and Total Equity of $6,000,000.
Using the formula [Debt / (Debt + Equity)], what is the company's gearing ratio?
A luxury hotel chain has Long-term Debt of $4,000,000 and Total Equity of $6,000,000.
Using the formula [Debt / (Debt + Equity)], what is the company's gearing ratio?
Answer options:
A.
40%
B.
60%
C.
66.7%
D.
150%
How to approach this question
Plug the numbers directly into the formula provided in the question.
Full Answer
A.40%✓ Correct
Using the specified formula: Debt / (Debt + Equity).
Debt = $4,000,000.
Total Capital (Debt + Equity) = $4,000,000 + $6,000,000 = $10,000,000.
Gearing = $4,000,000 / $10,000,000 = 0.40 or 40%.
Common mistakes
Using the Debt/Equity formula (66.7%) despite the question explicitly providing the Debt/(Debt+Equity) formula.
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