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Financing – Capital structure
3.3 Graphical representation of the M & M no tax theory
Cost of k e
capital %
WACC
k d
Gearing (D/E)
3.4 M & M's with tax theory
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.
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