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Chapter 4

Theoretical considerations

2.1 Impact on the weighted average cost of capital (WACC)

The WACC is calculated using the following formula:

V e V d
WACC = k + k (1 – T)
d
e
V + V d V + V d
e
e
(covered in more detail in the later Chapter 6)

The impact of changing capital structure

It is clear that if a company changes its capital structure (gearing level), the WACC
will change, since the ratio of debt to equity is a key variable in the formula.

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