FM Chapter 19 Questions – The cost of capital – the effect of changes in gearing
17 Comments
A
Ayman·
In question 5, I understand that the share repurchase scheme can increase the EPS but I am not sure why shareholders do not have the power to demand an increased dividend. I think it could be possible (even though it would be less likely) for the shareholders to require an increased dividend now instead of the growth of the company.
J
John MoffatTutor·
They can vote against the dividend proposed by the directors, but although they might want a higher dividend they cannot demand it.
A
Ayman·
Understood, Thank you.
A
Abhishek Agarwal·
Respected sir,
Can you please explain me question no. 1 , as how WACC decreases in Traditional view?.
J
John MoffatTutor·
The question does not say that the WACC does decrease, it says that it might decrease. Under the traditional view the WACC will change as gearing changes. It will decrease until we reach the optimal level of gearing as I explain in my free lectures.
A
Abhishek Agarwal·
THANK YOU SIR
E
elton·
good afternoon. pls i just enroled to this programme. but my desire is no know how to approach the longer constructed response questions. any way u can help?
S
SOLANKAR·
80percent
D
draganel·
I don't understand the logic in Q5. Can you help me?
The formula for EPS is PAT/No of shares, if company repurchase the shares that means that no of shares will increase result that EPS will fall, because is divided to no of shares that increase actually.
In the case of Gearing the same logic: Gearing=Debt/Debt+Equity that means that if Equity will increase the Gearing will decrease but not increase as is mentioned in response.
Explain please why my explanation is vice-versa?
Thank's in advance :)
J
John MoffatTutor·
If a company repurchases shares it means that they buy them back from shareholders and cancel them
Therefore there are fewer shares in issue (not more).
D
draganel·
thanks
J
John MoffatTutor·
You are welcome :-)
X
Xander·
Could you explain how question # 5 works. I didn't see it in the notes or remember hearing it in the lecture. Thanks
S
SAHANA·
Awesome test.. I did not know any answer but I learnt a lot ?
J
John MoffatTutor·
I hope that you are watching the free lectures as well :-)
Can you please explain me question no. 1 , as how WACC decreases in Traditional view?.
The formula for EPS is PAT/No of shares, if company repurchase the shares that means that no of shares will increase result that EPS will fall, because is divided to no of shares that increase actually.
In the case of Gearing the same logic: Gearing=Debt/Debt+Equity that means that if Equity will increase the Gearing will decrease but not increase as is mentioned in response.
Explain please why my explanation is vice-versa?
Thank's in advance :)
Therefore there are fewer shares in issue (not more).