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debt

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › debt

  • This topic has 2 replies, 2 voices, and was last updated 5 months ago by John Moffat.
Viewing 3 posts - 1 through 3 (of 3 total)
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  • January 27, 2022 at 12:47 am #647557
    johnbriane
    • Topics: 146
    • Replies: 147
    • ☆☆☆

    Dear sir

    i went through the 19th chapter lectures and ended up having the below doubt

    could you please look into this doubt

    thank you

    when more and more gearing is introduced the wacc tends to decline and does this gets applied under all circumstances ?

    January 27, 2022 at 1:04 am #647558
    johnbriane
    • Topics: 146
    • Replies: 147
    • ☆☆☆

    and secondly sir

    the reason why we choose debt finance over equity finance is that

    equity is more riskier than than debt because shareholders are always paid last hence they demand more dividends and in turn dividends ( equity finance ) are taxable

    and the other reason why debt is preferred over equity is that
    with debt finance there are tax reliefs or benefits

    am i correct sir

    thank you

    January 27, 2022 at 9:18 am #647582
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49601
    • ☆☆☆☆☆

    In theory (and according to Modigliani and Miller) the WACC will fall with higher levels of gearing. However this is in theory and does not have to be the case in practice.

    What you have written in your second post is correct except in so fat as dividends are not taxable – it is the fact that dividends are paid out of after-tax profits and do not save tax (whereas paying interest on debt does save tax).

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