I'm having a real problem with gearing. All through my mock exams if it relates to gearing I will get the question wrong. In my most recent onmline mock I dropped 6 points and they were all in one way or another to do with gearing.
So what am I missing?
Takes this question from the October 2008 mock exam
If capital employed in a Ltd Co was £2.1m and long term borrowing was £1.0m, would the gearing be high or low?
In my answer I used
1.0m / (2.1m + 1.0m) x 100 = 32% low geared
The correct answer is : Highly geared
So where am I going wrong. I just can't my head around this.
__________________
Never buy black socks from a normal shop. They shaft you every time.
As discussed in the previous answer in relation to gearing ratio's there are several commonly used correct methods of calculating the answer and each gives wildly different results. The real emphasis with gearing is consostency of application rather than the method used.
For example, gearing can be calculated as :
1) Prior charge capital / Equity * 100
2) Prior charge Capital / Equity plus prior charge capital * 100
3) Prior charge capital / total capital employed * 100
You seem to have opted for option (2) which will as you suggest give an answer of 32% (or more to the point 32.26%)
Option (1) however would have given an answer of 47.62%
And you probably don't have enough information in your question for option (3)
However, this is very simplistic as even prior charge capital is not properly defined in any standard so there may be differences between entities in how that is calculated as well.
In this instance either there must be more to this question or the ICB need to define their question better or they need to state how gearing is to be calculated if they are not willing to accept any commonly used alternative (which could give completely different answers yet still be correct).
Can you give us the question exactly as it appears in its entirety please Peasie (don't think that it's too naughty as it's just a mock) and we'll see if there is any obvious clue as to which gearing option we should be using.
talk soon,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
That is all there is to that question. On rethinking I though it might be 1 / 2.1 x 100 but even that would be low geared. I was under the impression that low geared was 50%. Maybe it is different figures in the definition of low and high geared?
This is question 5 in the mock exam.
Question 5.1 : What is meant by the term Net Book Value of a Fixed Asset?
Question 5.2 : Define the term Capital Employed?
Question 5.3 If capital employed in a Ltd Co was £2.1m and long term borrowing was £1.0m, would the gearing be high or low?
There are no other figures mentioned.
I'm wondering if there are mistakes in their answers. From the next mock exam (Feb 2009) it gives you a list of fixed assets, current assets, current liabilities and long term liabilities. In other words, the top half of a balance sheet. From that they ask the following : 1. What is the value of Equity or Shareholders Interest? 2. What is the value of capital employed? 3 What is the value of Total Assets? 4 What is the value of Total Liabilities? 5 What is the value of Net Current Assets 6 Gearing is a measure of ....... 7 If the company decided to issue a further 200000 shares (£1 each nominal) at £1.40, the total value of the assets would increase to what?
I've deliberately left out the list of the various assets and liabilities and the amounts. I'm not interested in the answers for 1 - 5 as I got them correct anyway. I'm not even interested at this time in No 6 (which you can't answer without figures). Now let's just say the answer to question 3 is £5m (it isn't - I just made that up as I don't want the answer to this exam just the theory behind MY answer).
My answer to question 7 would be £5.28m The answer ICB give is £280,000. They ask in the question what it would increase TO, not what it would increase BY.
EDIT : They also don't state anywhere how many decimal places an answer is to be calculated to. There was one in the mock online exam this would apply to but I probably got it wrong in the formula rather than decimal places. Bearing in mind these exams are marked by a computer and not by a human.
EDIT 2 : Getting my excuses in early.
-- Edited by Peasie on Monday 15th of August 2011 01:37:09 AM
-- Edited by Peasie on Monday 15th of August 2011 01:38:16 AM
__________________
Never buy black socks from a normal shop. They shaft you every time.
I'm lying in my bed still thinking about this (and it gives me a chance to reply on the mobile version if the forum).
Question 6 - that is not the full question. They are not asking for a definition.
__________________
Never buy black socks from a normal shop. They shaft you every time.
In the absence of further information in the question it would seem that you are right and the issue in this instance is with the question Peasie.
Looking at those figures alone there is no indication to suggest that the company would not be able to meet its liabilities with comfort so it certainly seems to be low geared to me.
If you're interested in it there's an article on gearing here :
Its heavier going than the ICB studies but it may help to give you a little more insight and confidence in this area.
Mistakes in exam papers are not restricted to the ICB. In the past even the ACCA has made the occassional whoopsie and I don't think that there's one study text that I've purchased that has all of the embedded question answers correct (or sometimes the answers are correct but the questions are wrong!).
Of course, that really doesn't help your immediate conundrum of is your answer right or wrong.
As the question does not ask for the exact % and all answers would seem to indicate low gearing, and there was no indication in the question given that the figures refered to a scenario given in an earlier question then the issue does indeed seem to be that mock paper is wrong although as I'm not looking at the entire paper so can't see if there are any cross question issues I cannot of course say that with 100% certainty.
Hope that you enjoy the above read Peasie.
All the best,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I'v asked on the ICB forum as well regarding the first point but so far no answer.
I really do get annoyed by their questions at times. That second example I think is designed to trip people up with the wording and in my opinion they have tripped themselves up when it came to the answer - unless I got it wrong.
__________________
Never buy black socks from a normal shop. They shaft you every time.
