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Sir when we were just calculating cost of equity we used the current equity does this assume the gearing level does not change? What if we were to raise new finance from equity only? does gearing change? if it does then how does this impact wacc?( do share holders return decrease)?
what about raising finance from debt only? in previous lectures on cost of debt we used the current debt is there also an assumption that gearing does not change? and also what if it does?
would be need to consider the marginal increase in the cost of equity due to more debt.? will the wacc be =cost of debt + the marginal incresase in the cost of equity?In Paper FM we always discount projects at the WACC which assumes that they intend to keep the level of gearing the same.
Obviously in real-life the gearing might change depending on how the finance is raised, but we do not deal with this until Paper AFM where if there is a substantial change in the gearing we use what is called an ‘adjusted present value’ approach. However again this is not until Paper AFM.
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