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Sir if we were considering raising finance from debt only. say the cost was 6% this is the first time were going raise debt and cost of equity was 20%. would we discount it at 6% or would we need to calculate wacc( just wanted to emphasize we are not raising any amount from equity) is wacc applicable only we are raising finance from part debt and equtiy?
In the lecture video for effects of gearing you used the whole 20% even when the finance was raised through debt. why do we use the whole why not consider just the marginal effect?
We still will discount at the WACC.
Although they may be raising the money from debt which is only costing 6%, the increase in the gearing will mean that equity will be requiring a higher return than they currently do. So the overall cost to the company will be higher and we assume (for reasons that I explain in my lectures) that the overall cost will still be the WACC.
sir should we not just consider the marginal extra cost. example the share holder would want 3% extra so should we just not consider the 3% extra?
If at the beginning they raised equity and the share holders required 20%that would be the cost but is now they raise debt @6% why do we take the whole 20% and not the extra cost that arised from taking in debt?
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