Wacc and gearing, Financial Accounting

Assignment Help:

WACC and gearing

There are two major theories linking a company's WACC and its gearing ratio.

(i) The usual theory of gearing proposes a "U" shaped WACC curve.

Cost of capital

941_WACC and gearing.png

Therefore if Oxfield plc is already at its optimal gearing level, G1, then any change in gearing will cause the WACC to increase. If Oxfield plc isn't already at optimal gearing then were the change in gearing to move it closer to G1 the WACC would drop but if further away from G1 the WACC would rise.

(ii) Modigliani and Miller ("M&M")

M&M forecasted that with corporation tax but without personal tax firms should gear up as much as possible.

163_WACC and gearing1.png

Therefore if Oxfield were to increase it's gearing its WACC would drop and a fall in gearing would increase the WACC.

In practice the force of a change in gearing would depend on market reaction.

Oxfield's current gearing level =Debt/Equity

                                                            =67m*97%/160m 2.10

                                                            =64.99/366

                                                            = 0.19

This appears low

(2) If Oxfield were to progress to a gearing level higher than the industry average the WACC could increase as the company is perceived as being more risky.


Related Discussions:- Wacc and gearing

Compositions and schemes of arrangement, COMPOSITIONS AND SCHEMES OF ARRANG...

COMPOSITIONS AND SCHEMES OF ARRANGEMENT The debtor may lodge a written proposal with the Official Receiver for a composition or other arrangement of his affairs within four day

What is stock split, Q. What is Stock Split? Stock Split - Increase in ...

Q. What is Stock Split? Stock Split - Increase in number of shares of a company's COMMON STOCK outstanding that result from the issuance of additional shares proportionally to

Modern techniques economic order quantity, The economic demand quantity can...

The economic demand quantity can also be found out with the assist of a graph. In this technique ordering cost, carrying cost and total inventory costs as per various lot sizes are

The rules of intestacy-executorship law, The rules of intestacy Agricul...

The rules of intestacy Agricultural land, crops and livestock in certain areas of Kenya are not covered by these rules; they are distributed according to the law or custom of t

Inter company balances-group accounts, Inter Company balances One of th...

Inter Company balances One of the companies may appear as receivable (debtor) or payable (creditor) in the other company’s books. Just like in accounting four branches, such in

When youre using accounting software, when youre using accounting software ...

when youre using accounting software why would you use hot keys and shortcuts a.to quickly access commands b.to input data for you c.to start the program d.to write checks

calculate the average issue price, Star Corporation issued both common and...

Star Corporation issued both common and preferred stock during 19X6. The stockholders' equity sections of the company's balance sheets at the end of 19X6 and 19X5 follow.

Which transaction results in an increase in revenues, Which of the followin...

Which of the following transaction results in an increase in revenues? a. receipt of accounts receivable b. purchase of inventory c. receipt of principal from bank loan d. delivery

Internal and external analysis on accounting, Write at least 7 full pages t...

Write at least 7 full pages that analyzes the internal and external environments for your organization. This paper must be in essay form. [If you have formatting questions, refer t

Quality discount and order quantity, The standard EOQ analysis is depends o...

The standard EOQ analysis is depends on the assumption which the price per unit keeps constant irrespective of the size of the order. While quantity discounts are obtainable, that

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd