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How level of debt will afffect cost of capital

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › How level of debt will afffect cost of capital

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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  • May 26, 2021 at 4:40 am #621777
    joynow
    Member
    • Topics: 42
    • Replies: 38
    • ☆☆

    Hi, Sir.

    I would like to ask, the higher the level of debt may result in the cost of equity rising, reducing the overall impact on the cost of capital.

    Why higher debt would reduces the impact on cost of capital? Is it due to the debt being tax deductible?

    Also, higher debt result in the cost of equity rising, is it due to the financial risk of using shareholder’s financing?

    May 26, 2021 at 9:29 am #621799
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54696
    • ☆☆☆☆☆

    The answer is yes to both of your questions 🙂

    I do suggest that you watch my free Paper FM lectures on Chapter 19 of our Paper FM lecture notes, because this is very much revision from Paper FM.

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