Chapter 18 - When And When Not To Use Weight Average

Question 1

Why is debt interest cheaper than equity dividend ?

Answer 1

1. Dividend is more risky as not guaranteed so higher return
2. Interest is tax allowable whereas dividend is not

Question 2

If debt is cheaper why not just finance all future requirements by debt

Answer 2

The more we finance by debt the higher the gearing will be. The higher the gearing the more risky the company is to investors and the more dividend return they require

Question 3

When to use the weighted average appraisal

Answer 3

1. When we want gearing to stay the same ratio because we are using the correct blend of debt and equity then the gearing won’t change