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Hi sir, I wanna ask.
Under this theory, why cost of debt to the company in graph keep reducing as the level of gearing increase?
I don’t know which graph you a referring to, but the cost of debt does not keep reducing!! In theory the cost of debt stays constant (expect at very high levels of gearing).
It is lower than the cost of debt had there been no tax because the company is saving tax on the interest paid.
Have you watched my free lectures on this, where this is all explained?
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