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Weighted average cost

Forums › ACCA Forums › ACCA FM Financial Management Forums › Weighted average cost

  • This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.
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  • May 6, 2020 at 7:25 am #570119
    gayathree1234
    Member
    • Topics: 40
    • Replies: 1
    • ☆

    Hi sir,

    is weighted average cost of capital is minimum when borrowings are maximised?

    Thank you:)

    May 6, 2020 at 8:23 am #570127
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    In future you must ask in the Ask the Tutor Forum if you want me to answer. This forum is for students to help each other.

    According to Modigliani and Miller, then if there is corporate tax the WACC will be a minimum when borrowings are maximised. (Without corporate tax the WACC will not change).
    However M&M relies on many assumptions that are unlikely to all hold in practice.

    This is all explained in my free lectures on the effect of changes in gearing.

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