# Another greenlight confusion

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Registered Posts: 124 Beyond epic contributor 🧙‍♂️
Question 7

Now i got first one right and last, but for the gearing ratio i did total debt/total equity x 100. I was under impression that this was equally valid way of calculating gearing ratio.
[h=3]Explanation of the correct answer:[/h] Interest cover = profit from operations / finance costs = £80,000 / £10,000 = 8. Gearing ratio = debt / (debt + equity) = £400,000 / £750,000 x 100% = 53%. Debt/equity ratio = debt / equity = £450,000 / £350,000 x 100% = 114%.

Here is an extract from the income statement for Meriden Ltd for the year ended 20X5.

Income statement extract
Year ended 20X5
£’000

Profit from operations
80

Finance costs
10

Profit before tax
70

At the end of the year, Meriden Ltd had total debt of £400,000 and total equity of £350,000.
Calculate the following performance indicators for the year, rounding to the nearest whole number:

Year ended 20X5
£’000

Interest cover

Gearing ratio (%)

Debt/equity ratio (%)

• Registered Posts: 57 Epic contributor 🐘
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The debt to equity ratio is the one you've got wrong; the other two are correct. You've put the debt at £450k, instead of £400k.
• Registered Posts: 124 Beyond epic contributor 🧙‍♂️
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Sorry Rachetman thats the official answer i havent put my answer on their. also its the how its calculated that i need clarified i was under impression 2 ways of calculating gearing total debt/total equity c 100, and debt / (debt + equity). i used the first which gives 114% and not 53%.
• Registered Posts: 57 Epic contributor 🐘
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I should clarify - for the debt to equity ratio, the correct answer is 114% [(£400k/£350k) x 100%]. And I'm sure the answer you gave for the gearing ratio (53%) is correct. I don't believe there is another way to calculating both gearing and DTE.
• Registered Posts: 645
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Zaf,

I wrote a full explanation of the ratios which I have just realised is irrelevant to you as you seem to have them correct. I've left it below in case it helps anyone else.

I don't understand your question - the correct answer is 114% (400k / 350k), which is also the model answer (although the answer contains 450k, the calculation is definitely done with 400k). You say you have used this formula and got 114%, which agrees to the model answer. Is it simply that the green light has marked it wrong despite you entering the correct answer? This seems to be a common problem, and may be worth adding to this thread: http://forums.aat.org.uk/forum/for-e...en-light-tests. I assume your correct gearing ratio answer was the 53%?