ief Finance Officer (CFO). Observation by Jhon: The Overall weighted Average Cost of Capital of the firm stayed same when the level of gearing increased. Observation by Tariq: The relationship between gearing and firms’ value is unaffected. When the Cost of Capital changed the firms value did not change. Observation by Reeta: When a tax rate is considered, the cost of capital decreased. When the level of gearing increased, and the firms overall value increased. Requirement
Meta Cola Company is a listed company. The company tracks the relationship between the level of gearing, cost of capital and firms value over the last 10 years. Recently, based on the historical data, the following observations are presented to the Chief Finance Officer (CFO).
Observation by Jhon: The Overall weighted Average Cost of Capital of the firm stayed same when the level of gearing increased.
Observation by Tariq: The relationship between gearing and firms’ value is unaffected. When the Cost of Capital changed the firms value did not change.
Observation by Reeta: When a tax rate is considered, the cost of capital decreased. When the level of gearing increased, and the firms overall value increased.
Requirement
Relate the observation of Meta Cola company to any of the best matching theory that explains the relationship between gearing ratio and firms cost of capital and value.
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