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

Comparative income satement in good form, Ask questihow to make comparative...

Ask questihow to make comparative income statement in good formon #Minimum 100 words accepted#

Describe the usiness entities:, Answer all of the parts in this task. Part ...

Answer all of the parts in this task. Part (i) is worth a maximum of 6 Marks - 1 Mark each part. Parts (ii) and (iii) are worth a maximum of 2 Marks each. (i) Describe each of t

Show the foreign tax credit, Q. Show the Foreign Tax Credit? Foreign Ta...

Q. Show the Foreign Tax Credit? Foreign Tax Credit - A U.S. taxpayer who pays or accrues income tax to a foreign country may elect to credit or deduct these taxes in a determin

Solutions, I see a question posted. I can I be sure the problem has been s...

I see a question posted. I can I be sure the problem has been solved. I tried calling your number but I got no answer

Instantaneous standard deviation, The current stock price of International ...

The current stock price of International Wood is $69 and the stock does not pay dividends. The instantaneous risk free rate of return is 10%. The instantaneous standard deviation

Masons gain formula, Refer to Figure, using the Mason's gain formula, deter...

Refer to Figure, using the Mason's gain formula, determine the transfer function of the system.

Preliminary expenses through the income statement, Alexandria Co. Ltd has a...

Alexandria Co. Ltd has an authorized capital of Rs 25,000,000 divided into 250,000 equity shares of Rs 100 each. 100,000 shares were issued to public and Rs 80 per share were paid.

Profit for the period-notes to the accounts, Profit for the period The pr...

Profit for the period The profit for the period has been arrived at after charging the following expenses: Normal 0 false false false EN-US X-NONE

Tracing trust property-breach of law-trusts laws , Tracing trust property ...

Tracing trust property   Apart from suing the trustee, in the event of a breach of trust, the beneficiary may follow the trust property and recover it from third parties, or the p

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