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Dear sir
i went through the 19th chapter lectures and ended up having the below doubt
could you please look into this doubt
thank you
when more and more gearing is introduced the wacc tends to decline and does this gets applied under all circumstances ?
and secondly sir
the reason why we choose debt finance over equity finance is that
equity is more riskier than than debt because shareholders are always paid last hence they demand more dividends and in turn dividends ( equity finance ) are taxable
and the other reason why debt is preferred over equity is that
with debt finance there are tax reliefs or benefitsam i correct sir
thank you
In theory (and according to Modigliani and Miller) the WACC will fall with higher levels of gearing. However this is in theory and does not have to be the case in practice.
What you have written in your second post is correct except in so fat as dividends are not taxable – it is the fact that dividends are paid out of after-tax profits and do not save tax (whereas paying interest on debt does save tax).
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