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WACC

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › WACC

  • This topic has 3 replies, 2 voices, and was last updated 9 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • December 4, 2015 at 10:41 am #287495
    dragon76
    Member
    • Topics: 50
    • Replies: 77
    • ☆☆

    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?

    December 4, 2015 at 2:09 pm #287536
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    If 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’.

    December 5, 2015 at 11:00 am #287797
    dragon76
    Member
    • Topics: 50
    • Replies: 77
    • ☆☆

    Much thanks Sir

    December 5, 2015 at 1:37 pm #287840
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    You are welcome 🙂

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