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

Short-term solvency, Example of Short-term Solvency             ...

Example of Short-term Solvency                           Current Ratio = Current Assets / Current Liabilities                                                = 5.38

Financial transaction reports , Answer both parts in this task. Part (i) is...

Answer both parts in this task. Part (i) is worth a maximum of 10 Marks, while part (ii) is worth a maximum of 5 Marks. (i) Minnie owes Micky Mouse $500 and hands him a cheque p

Wider-range investments-accounts under trustee, Wider-range Investments ...

Wider-range Investments (Requiring advice in writing from a properly qualified person) Quoted shares of a company with a paid-up capital of not less than Shs10m and has

Revocation, Revocation, alteration and revival of a will 1. A will may ...

Revocation, alteration and revival of a will 1. A will may be revoked or altered by the maker of it at any time when he is competent to dispose of his free property by will.  (

Corporate accounting system, 1. This assignment is to be submitted as an in...

1. This assignment is to be submitted as an individual assignment.  2. Marks will be deducted for poor quality presentation. For guidance on the requirements for the presentatio

Which is not necessary in order for corporation to pay cash, Q. Which one o...

Q. Which one of the following is not necessary in order for a corporation to pay a cash dividend? a. Adequate cash b. Approval of stockholders c. Declaration of dividends by the bo

What do you mean by depreciation, Q. What do you mean by depreciation? What...

Q. What do you mean by depreciation? What are the causes for depreciation? Explain the two methods of depreciation. Depreciation means a fall in the quality, quantity or value o

Correction of errors, How to treat them both which affect the trial balance...

How to treat them both which affect the trial balance and which dont affect the trial balance

Calculate income (or loss) for 2012, A lawn care company started business o...

A lawn care company started business on January 1, 2012. The company billed clients $105,000 for lawn care services completed in 2012. By December 31, the company had received $84,

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