TAILIEUCHUNG - Lecture Investment analysis & portfolio management - Chapter 21

After studying this chapter you will be able to understand: Gearing, financial risk and the cost of capital, traditional theory, modigliani and miller’s theory. | Investment Analysis Lecture: 21 Course Code: MBF702 Outline RECAP GEARING FINANCIAL RISK AND THE COST OF CAPITAL TRADITIONAL THEORY MODIGLIANI AND MILLER’S THEORY Gearing effect Recap Gearing Effect - Recap Gearing effect - Recap There are two main schools of thought Traditional view Modigliani and Miller’s theory TRADITIONAL THEORY As per the traditional theory, till a certain point, if we keep on introducing debt, Kd = fairly constant Ke = increase marginally WACC = keep on decreasing Subsequently; Ke = increase sharply Kd = increases WACC = starts increasing Kd remains constant as gearing level rises upto a level after which it increases Ke rises as gearing level TRADITIONAL THEORY Initially as the gearing level rises, WACC falls due to cheaper debt (KD is always lower than Ke). However if it continues to increase the increase in Ke would become insignificant & WACC should start increasing Conclusion: with change in D/E ratio, WACC changes, therefore, WACC is not equal to the .

• Tài chính doanh nghiệp
• Investment analysis
• Portfolio management
• Investment management
• Investment theory
• Investment environment
• Investment analysis
• Investment companies
• Time value of money
• Characteristics of investment
• Investment portfolio management
• Investment analysis & portfolio management
• Investment background
• Developments in investment theory
• Management of common stocks