AXYZ Company is a listed company. The company tracks the relationship between the level ol gearing,...

 

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AXYZ Company is a listed company. The company tracks the relationship between the level ol gearing, cost of capital and firms value over the last 10 years. Recently, based on the historie Observation 01: The Overall weighted Average Cost of Capital of the firm is sensitive to the data, the following observations are presented to the Chief Finance Officer (CFO). level of gearing. Upto 48% of gearing ratio, the WACC reduced gradually, and stayed constant,- > till 65% of gearing and started to increase after that./ Observation 02: The relationship between gearing and firms' value is inverse to the relationship to Cost of Capital. Whenever Cost of Capital reduces the firms value increases and vice versa. The CFO seeks your assistance to understand this context. Requirement Relate the observation of AXYZ company to any of the best matching theory that explains the relationship between gearing ratio and firms cost of capital and value. (10 Marks) (maximum 200 +/-10% words) AXYZ Company is a listed company. The company tracks the relationship between the level ol gearing, cost of capital and firms value over the last 10 years. Recently, based on the historie Observation 01: The Overall weighted Average Cost of Capital of the firm is sensitive to the data, the following observations are presented to the Chief Finance Officer (CFO). level of gearing. Upto 48% of gearing ratio, the WACC reduced gradually, and stayed constant,- > till 65% of gearing and started to increase after that./ Observation 02: The relationship between gearing and firms' value is inverse to the relationship to Cost of Capital. Whenever Cost of Capital reduces the firms value increases and vice versa. The CFO seeks your assistance to understand this context. Requirement Relate the observation of AXYZ company to any of the best matching theory that explains the relationship between gearing ratio and firms cost of capital and value. (10 Marks) (maximum 200 +/-10% words)

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Net income approach or dependence theory will be advocating that when there would be a higher level ... View the full answer