Page 363 - FM Integrated WorkBook STUDENT 2018-19
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Capital structure
Modigliani and Miller (M&M) – 1963
theory with taxation
When the effect of tax is taken into account, the tax relief on debt
interest causes the WACC to fall (and the business value to rise) as
gearing increases.
Implication: The optimum gearing level is 99.9% debt.
Cost of
capital % k e
WACC
k d (1–t)
D/E
353
