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OpenTuition | ACCA | CIMA
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OpenTuition | ACCA | CIMA
Free ACCA and CIMA on line courses | Free ACCA, CIMA, FIA Notes, Lectures, Tests and Forums
Hi John,
first of all i want to thank you so much for your lecture about traditional theory and M&M about capital structure. you delivered this lecture in such a simple way, yet include all the important points, which should be there to make the students to comprehend the theories.
in the video you mentioned that M&M theory assumes that the debt is irredeemable. and this has caused the Kd to be in the consistent rate. is my interpretation about the assumption correct ?
thanks in advance for your response
Thank you for your comment 🙂
The proof of M&M (which is not required for the exam) does assume that the debit is irredeemable. However the fact that Kd is constant is because we assume also that the debt is risk-free. The assumption that it is irredeemable is because otherwise the gearing would change in the future due to having to repay it.
Thanks 🙂 once again, what a mind-blowing explanation.!
Pecking order theory is concerned with the raising of long-term capital (not short-term finance, which is what delaying payments is).
Hello sir. Please can tax benefits be applied to preference shares?
No. Because preference share holders get dividend and dividends are not tax allowable.
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 🙂