Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Cost of capital and its impact on finance decisions
- This topic has 5 replies, 2 voices, and was last updated 7 years ago by John Moffat.
- AuthorPosts
- May 26, 2017 at 1:56 pm #388274
Hi Sir.
Questions.
How does Point 1) increase shareholder wealth.
1) Average cost of capital is decreased by a recent finance decision.
May 26, 2017 at 4:05 pm #388300If the cost of capital is lower, then the market value of the firm is higher (because we are discounting the free cash flows at the WACC). The increase in the market value of the firm goes to the benefit of the shareholders, so the market value of the shares will increase (which is the measure of shareholders wealth).
May 27, 2017 at 10:09 pm #388486thanks for the explanation. But what type of finance decision would cause the average cost of capital to decrease?
May 28, 2017 at 10:23 am #388533Any resulting change in the gearing due to the method of financing will cause the WACC to change (unless, of course, there is no tax in which case in theory the WACC will stay contents. But this situation is very unlikely in P4.). Raising more debt finance will reduce the WACC because of the tax benefit associated with debt.
I really do suggest you watch my free lectures, including the free lectures going through Chapter 19 of the Paper F9 lecture notes because this is revision from Paper F9.
May 28, 2017 at 10:38 am #388538thanks Sir. I had a total mind freeze and completely missed that average cost of capital is WACC. I will check out the lectures for a refresh it has been a while.
Thanks
May 28, 2017 at 10:43 am #388542You are welcome 🙂
- AuthorPosts
- The topic ‘Cost of capital and its impact on finance decisions’ is closed to new replies.