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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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