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:

40%

60%

66.7%

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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Practice the full ACCA MA — Management Accounting Practice Exam 5

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