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Please can you explain, why is cost of capital calculated on the basis of target ratio and not the actual debt and equity ratio given in balance sheet of 2006 & 2007?
This has never been something I’ve been happy with. Any company could state a target gearing ratio and adopt one with a low WACC so that it could look good. For the year’s in question the company had to earn enough to pay for its cost of capital and it seems to me that to decide if it came out ahead of the game for those years it should use the actual gearing and WACC.
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