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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Capital structure theory
Hello Tutor,
I had watched the lecture about the 3 theory of capital structure,but I still don’t understand why the below statement is false?
“In the traditional view, there is a linear relationship between the cost of equity and financial risk.”
for financial risk which means its gearing, and I remembered the gearing increase and so the cost of equity will increase,or its not a linear relationship?
Thank you.
The cost of equity will increase with the level of gearing, but there is no reason at all why it should increase linearly under the traditional view.