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Pecking order theory is concerned with the raising of long-term capital (not short-term finance, which is what delaying payments is).
Hi John,
In terms of financing working capital , within the pecking order theory where would you place
withholding supplier payments?
Hello sir,
How can there be a cost of debt 10% in the example 1 when there is no debt at all. 0 % share of debt is given in scenario 1 of example 1?
Why not? Maybe you could borrow money from the bank at a cost of 10% – it doesn’t mean you will necessarily be borrowing it 🙂
Anyway, the graph is only of relevance in explaining what happens to the WACC and since they are not borrowing debt at 0% gearing, it is not included in the calculation of the WACC!!
That expalains it.
Thank you 🙂
You are welcome 🙂