1. avatar says

    Please Mr. john tell me how to express my great of great thanks to you, words are never enough for such efforts, I need to thank you in more practical way… I really feel that you are a gift from Allah (god) … And as I said, words are never enough.
    Should we comment, recommend, pay… You just say please.

  2. avatar says

    respected sir…
    i wana ask at 46:30 ….
    if a company has no interest and have 70 to pay without risk…
    and a company paying 80 with risk…
    its the geniune condition… why would anyone suppose to pay 20 interest for comparison…
    i mean if the company is not geared… it will pay 70…
    why we imagine 50???
    if there is no debt…

    • Profile photo of John Moffat says

      Firstly, I was only trying to make the point in a simple way – it is not necessary for the exam.

      However, we are not thinking about risk for the company – it is risk for the shareholder that we are concerned with (because it is the shareholders who fix the market value of the shares, and it is shareholders who determine the cost of equity)

      If the shareholders receipt of dividend is after payment of fixed interest then there is risk for the shareholder (as I explain the lecture).

      So it is not valid to compare the dividend received from a company that is paying interest out of its profits, with the dividend received from a company that is not paying interest – the risk for the investor is different (the more fixed interest is payable, the more risky the dividend).
      So to try and make the risks the same (so we can compare the two dividends), M&M had the investor in the ungeared company borrow money specifically so that they would have to pay fixed interest. The idea is that then in both cases the investor is receiving the dividend after payment of fixed interest and so we could compare the two.

      Again, the risk we are talking about is the risk to the investor – the shareholder. As is explained in the lecture, the more the fixed interest, the more the riskiness of the dividends.

  3. Profile photo of Mahoysam says

    I find this really interesting, I have made up my mind now, I will choose P4 as an optional paper!
    At some level, it just doesn’t make much sense to me that the WACC remains constant if there was no tax involved! How can the fall in cost of capital as a result of raising more debt cancel out against the increase in dividend as a result of higher risk. It assumes that shareholders will require a higher return (because of risk) that amounts EXACTLY to the fall in the cost of capital because of cheap debt, doesn’t it? In real life, I don’t think that shareholders calculate the difference between debt cost and equity cost and then demand the dividend to increase by this much! Am I getting the point wrong here? – Perhaps this point is covered under the assumption that shareholders react reasonably to risk!


  4. avatar says

    Dear John wat about the proposition my Mr Durand ( the net income approach and net operating income approach) where in the net operating income approach it says capital structure does not effect the WACC

    • Profile photo of John Moffat says

      What about David Durand?
      He was one of several people who criticised M&M because of the assumptions that they made and came up with other suggestions.
      However it is only M&M that is in the syllabus (together with knowledge of the main assumptions they made).

    • Profile photo of John Moffat says

      @cris1993, It depends.

      If it is just a general written part of a question then he will expect you to describe the traditional theory, M&M without tax, and M&M with tax.

      If it is a question where you have had to do calculations first and then you are asked to comment on the different ways of raising finance that were in the question, then you will comment on the figures that you have calculated (for example, if you were asked to calculate the EPS for different ways of financing, then the one giving the higher EPS will be more attractive). But you will of course comment on whether the gearing has increased or decreased (and therefore the risk).

      • Profile photo of Ken says

        ok, many thanks
        and if there is a mix of equity and debt finance then the WACC will be constant but below 10%?

      • Profile photo of Ken says


        Dear Sir,
        What I was trying to say that: In this example we are taking 10% as a Equity cost of capital which is 100% but, instead say: if we take mix of Equity and Debt finance and say 40% and 60% wiith 10% and 5% cost of capital, then surely WACC will be between 10% and 5% constant, which prove this graph is correct? Please advice.
        Kind Regards,

      • Profile photo of John Moffat says

        @Ken, But if you bring in debt finance then the higher gearing will mean more risk to shareholders and so they will require a higher return and so the cost of equity will be higher.

        In theory (according to Modigliani and Miller), if there is no tax, the cost of equity will increase to 17.5%.

        The WACC will therefore be (40% x 17.5%) + (60% x 5%) = 10%

        If there is no tax, then according to M7M the WACC will stay constant for all levels of gearing. (If there is tax then the WACC will fall with higher gearing because of the tax relief on the debt interest – for that see the next example in the Course Notes)

  5. avatar says

    Thanks for the good lecture but i would like to find out, if you look at the graph on 3.1 based on modigliani and millers’s theory will the WACC remain constant at 10percent or maybe a percentage lower then 10percent as illustrated in the notes?

      • Profile photo of Ken says

        @johnmoffat, @sandycmkm

        I disagree with @sandycmkm….WACC will always sit between Equity and Debt Only when Equity is 100% then the WACC is equal to Equity eg 10%…the moment any entity take any other form of finance WACC will change…I hope you guys get my point?

      • Profile photo of John Moffat says

        Graph 3.1 is wrong.

        When it is 100% equity then the WACC will equal the cost of equity.

        Also, because it is illustrating M&M without tax, the WACC will stay constant whatever the level of gearing.

  6. avatar says

    I think John Moffat is very good indeed. I studied with Kaplan ih the UK and none of the lectures have the same ability to translate F9 on such an understandable – or less complicate – lecturer.
    I failed F9 and know what I am talking about…
    If you do read it or are told about it, believe me you are good.
    Thank you.

  7. avatar says

    You are not only training us to be Chartered Accountants but also to be regconised as Global Accountants in the real World. What more? Continue to fail? No, we have someone who genuinely explains more than what other Lectures can. His name is John Moffat. I personally appreciate Joe everything you did including your commitment and time.

  8. avatar says


    If you are after his last assumption which said share holders are indifferent to corporate gearing and personal gearing, I recon he has said the assumption was to, not to think about the consequences. That is before actually investing money, how would the shareholder react to the risk of the company going bankruptcy, where he is expecting some dividends, and also how does he react if the other company too goes bankrupt where he is actually borrowing money.

    Ignore these two reactions, when actually investing & borrowing money. ie indifference to corporate gearing and personal gearing

  9. Profile photo of barpete says


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