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John Moffat.
John Moffat.-
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Anonymous
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Sir, I have 2 questions :
1. In BPP Biz finance section C Bar Co, part D answer scheme explains the dangers of gearing by talking about the operating gearing. Is it acceptable for me to write about how higher gearing multiplies systematic risk of a share which raise cost of equity and the WACC ?2. Will doing a working through the use of cells ie. =C4*C5 rather than writing the whole thing down ie. TERP X no of shares get me full marks?
John Moffat
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1. No. The question asks for discussion of the dangers of high gearing, and the answers discusses both operating gearing and financial gearing as required.
(Also, although higher gearing will increase the riskiness of a share, and therefore the cost of equity, that does not automatically mean that the WACC will increase.)2. Yes. The marker is able to see what functions you have used in the spreadsheet.
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