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interest rates

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › interest rates

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • November 25, 2014 at 8:33 pm #213232
    nari
    Member
    • Topics: 261
    • Replies: 176
    • ☆☆☆

    Hello john, I’m reading something here which says ” the higher share value results in a lower cost of equity capital,and hence a lower overall cost of capital for the company”. I’m confused as I thought it would be the opposite. Can you please explain? Thanks

    November 26, 2014 at 10:16 am #213354
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    I don’t know where you read that, but as it is written it is terribly badly expressed.

    A share price will be higher either because shareholders are expected higher future dividends, or because there required rate of return has reduced. (It is shareholders who fix the market value).

    If it is because there required rate of return has reduced, then yes – the cost of equity to the company will also be lower (the company has to give shareholders the return they require).

    November 27, 2014 at 10:22 pm #213954
    nari
    Member
    • Topics: 261
    • Replies: 176
    • ☆☆☆

    Its from a preparation question in bpp’s practice & revision kit. Its one of the points listed under ‘implications of a fall in interest rates for a typical company’

    November 28, 2014 at 11:12 am #214041
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    As I wrote before, the statement is correct (just badly worded).

    I hope you understood my explanation OK.

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