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sir am really struggling to understand how WACC remains constant in M&M(no tax) theory? I mean when gearing (D/E) increases(with constant cost of capital), cost of equity increases, so when one of the two factors(kd and ke) determining WACC increases while other stays constant, how can WACC remain constant?
Just to give you an example of curves of the graph, cost of equity should be like Variable costs graph, cost of debt should be like fixed costs graph and WACC should be like total costs graph in M&M(no tax). But it is nowhere even close to my understanding of it.
Sir could you shed some light?
many thanks!
It seems that you have not watched my free lectures on this because I explain this precise point in my free lectures on the impact of financing.
If you are still unsure after watching the lectures, when watch my free Paper FM (was Paper F9) lectures on the effect of changes in gearing, in which I draw the graphs and illustrate with numbers.
(The WACC is not totall cost – it is the weighted average. With more gearing, there is more weighting given to the cheap cost of debt.)
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