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Financial structure vs business valuation

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Financial structure vs business valuation

  • This topic has 3 replies, 2 voices, and was last updated 7 years ago by John Moffat.
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  • November 27, 2015 at 4:36 am #285611
    dragon76
    Member
    • Topics: 50
    • Replies: 77
    • ☆☆

    John,

    I do not understand why M&M said that the value of the company is not affected by its financial policy due to, in my opinion, the Financial structure clearly impact WACC, in turn impact the valuation of business via NPV, pls. clarify

    November 27, 2015 at 8:03 am #285642
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    M&M only said that in the situation where there is no tax.

    They then went on to look at the impact of tax and concluded that a company should be as highly geared as possible because of the tax benefit associated with debt borrowing – as they also said, this will reduce the WACC and increase the value of the business.

    I do suggest you watch the free lectures on this (including the F9 lectures that go with Chapter 19 of the F9 lecture notes – discussion of M&M with and without tax is revision of Paper F9. All of the calculations relating to M&M only come at P4.)

    November 30, 2015 at 2:35 am #286277
    dragon76
    Member
    • Topics: 50
    • Replies: 77
    • ☆☆

    much thanks, I will review as your suggestion

    November 30, 2015 at 7:33 am #286305
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51532
    • ☆☆☆☆☆

    You are welcome 🙂

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