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Caapital struucture

Moodigliani andd Milleer (M&&M) – 1963

theeory wwith taxxation

W When the efffect of taxx is taken innto accounnt, the tax rrelief on deebt
interest causses the WAACC to fall (and the business vvalue to risse) as

geearing incrreases.

Immplication: The optimmum gearing level is 99.9% deebt.

Cost of
capital %% k e

WACC

k d (1–tt)

D/E

351