PEV-pls help

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JanaV
JanaV Registered Posts: 8 New contributor 🐸
in AAT Level 4 (Level 8 in Scotland)
Hi there,

I am currently revising PEV & PCR. I tried PEV June 2008 last night. I had a few problems though. Could anybody explain to me how to count gearing ratio and interest cover in a task 2.1?

Also task 2.2 is a bit difficult for me. I managed to do task 2.2a but was stuck with 2.2b. It should be recalculation for producing of 14000 turbines.
How did they come with such a strange number of 10M? I tried so many times and always end up with 8M

If anybody know please help me as I am not able to continue in this task.
Many thanks
Jana

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  • wolfe
    wolfe Registered Posts: 121 Dedicated contributor 🦉
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    hey
    the gearing ratio is calculated by dividing the debt (long term liabilities) by capital employed. capital employed is long term liabilities + capital or net assets + long term liabilities.

    so in scenario 12000 /(8400+12000)=58.82%
    in scenario 2 gearing ratio is 11300/(11300+8400)=57.36%
    this ratio tells us how much of the business is financed by debt instead of shareholder's equity. the higher the gearing ratio the more the company is considered risky by lenders. such comapny is called highly geared or leveraged.

    the interest cover is calculated by dividing the operating profit (that is profit before interest and tax) by the interest cost.
    scenario 1 2750/600=4.58 times
    scenario 2 2250/600=3.75 times
    the interest cover shows how many times a comapany is able to pay its interest. the more times the better.

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