ACCA FR · Chapter 14 · Question 12 of 15
Reedbuck Co has profit before interest and tax of $600,000 and finance costs of $150,000. It has interest-bearing debt of $2,000,000 and equity of $3,000,000. Using gearing defined as debt / (debt + equity), what are its interest cover and gearing?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Interest cover 4 times; gearing 40%
Explanation
Interest cover = PBIT / finance costs = $600,000 / $150,000 = 4 times. Gearing = debt / (debt + equity) = $2,000,000 / $5,000,000 = 40%. Debt / equity would be 66.7%, which is a different definition.
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