- This topic has 3 replies, 2 voices, and was last updated 6 years ago by
.
- Posts
There is a statement that WACC falls with higher gearing therefore WACC of a geared company will be less than WACC of all equity finaced company which would be cost of equity calculated using asset beta
Here instead of asset beta, should not it be written equity beta?When we say that WACC of a geared company must be lower than Ke calculated using beta equity. Can you please explain me this statement, also in this statement are we assuming any capital structure theory, if yes then which theory it is being assumed?
No – the first statement is correct. If a company is all equity financed then the equity beta is equal to the asset beta.
The WACC falls with higher gearing – this is MM with tax.
And Sir the first statement which says that WACC falls with higher gearing therefore WACC of a geared company will be less than WACC of all equity finaced company which would be cost of equity calculated using asset beta. This statement holds true under both MM with tax theory as well as traditional theory OR does it hold true only in MM with tax theory ?
- The topic ‘WACC’ is closed to new replies.