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Hello Tutor,
I have been having hard time understanding WACC. What is WACC. Why would a company want to reduce it?
How the MM theory helps to reduce it?WACC is weighted average cost of capital – it is the overall cost of finance for the company.
The company wants to reduce it because the cheaper they borrow the better (and cheaper cost of money will lead to higher market value).
MM does not itself help reduce it. They say that in the absence of tax the WACC will stay the same regardless of the level of gearing. However, with tax, higher gearing will mean lower WACC because of the tax benefit associated with debt borrowing.
Have you watched my free lectures on here on WACC and on Modigliani and Miller?
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