Whichever theory (M&M without and with tax) you believe, whether there is
or isn’t tax, provided the gearing ratio does not change the WACC will not change, it do not understand this statement in an Article due to although the Gearing ratios not change but the cost of equity and the cost of debt may change and the WACC shall change, is it right, pls. explain?
Ask the Tutor ACCA AFM
WACC
10y ago#1If the gearing ratio does not change, then there is no reason for the cost of equity or the cost of debt to change (the cost of equity will only change because of changes in gearing).
Therefore if they keep to the same gearing ratio the WACC will not change.
(What you may be confusing it with is that in the future costs may change because general interest rates go up or down, however this has nothing to do with changes in gearing. Gearing itself will only have an effect on the WACC if it changes.)
I hope that makes it clear, but if not then I do suggest that you watch the Paper F9 lectures on 'the effect of changes in gearing'.
Much thanks Sir
10y ago#3You are welcome :-)
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