imported>Doug Williamson |
imported>Doug Williamson |
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| '''1.''' <br />
| | (SPE). |
| <i>Financial gearing</i> measures the relative amount of debt in a firm's capital structure.<br />
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| Gearing is sometimes also known as <i>leverage</i>.
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| | A legal entity established to facilitate restricted transactions or purposes for a particular sponsor or sponsors, often characterised by severely limited independence of decision making and a relatively small capital base. |
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| Gearing and leverage ratios can be calculated in several different ways, so consistency of approach is important.
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| | An SPE used for a securitisation is known as a securitisation special purpose entity (SSPE). |
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| Two essential bases to define are:
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| i. The use of book or market values.<br />
| | == See also == |
| ii. The use of Debt divided by Equity (D/E) or of Debt divided by Debt plus Equity = D / (D+E).
| | * [[Conduit]] |
| | * [[Securitisation]] |
| | * [[Special purpose vehicle]] |
| | * [[Sponsor]] |
| | * [[SSPE]] |
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| | | [[Category:Compliance_and_audit]] |
| <span style="color:#4B0082">'''Example 1: Calculation of gearing'''</span>
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| <i>Gearing</i><br />
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| Assume the values of debt and equity are equal, say USD 1m each.<br />
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| D/E = 1/1 = 100%.<br />
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| This is usually known as 'gearing'.
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| <span style="color:#4B0082">'''Example 2: Calculation of leverage'''</span>
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| <i>Leverage</i><br />
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| Using the other calculation with the same inputs (D = 1 and E = 1):<br />
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| D / (D+E) = 1/2 = 50%.<br />
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| This is usually known as 'leverage'.
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| <b>Adjustments to D and E figures</b><br />
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| With respect to the Debt figure, practice varies in including or excluding certain items such as cash, short term borrowings, leases, pensions and other provisions.<br />
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| Practitioners may also adjust the Equity figure, for example to exclude intangible assets.
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| <b>Bank supervision</b><br />
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| In the banking context, the calculation of the regulatory [[Leverage Ratio]] is strictly specified, following [[Basel III]].
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| '''2.''' <br />
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| <i>Operational gearing</i> relates to the operating costs of a business, and measures the relative proportions of fixed and variable operating costs.
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| '''3.''' <br />
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| 'Gearing up' refers to increasing the levels of financial or operation gearing - or both - within an organisation.<br />
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| The intention of gearing up is to improve expected net results. <br />
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| A consequence of gearing up is normally to increase risk.
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| Many financial disasters have been a consequence of gearing up (or leveraging) excessively in this way in earlier periods.
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| ==See also==
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| * [[Balance sheet ratio]]
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| * [[Basel III]]
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| * [[Debt equity ratio]]
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| * [[Debt to equity ratio]]
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| * [[Geared beta]]
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| * [[Intangible assets]]
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| * [[Leverage]]
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| * [[Leverage Ratio]]
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| * [[Leveraged]]
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| * [[Leveraged takeover]]
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| * [[Levered]]
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| * [[MCT]]
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| * [[Off balance sheet finance]]
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| * [[Tax shield]]
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| * [[Ungeared]]
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| * [[Ungeared cash flow]]
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| ===Other links===
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| [http://www.treasurers.org/node/8012 Masterclass: Measuring financial risk, The Treasurer, July 2012]
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| [[Category:Corporate_finance]] | |
