... the interest rate of the debt remain constant. They believe the advantages of borrowing overcome the disadvantages of financing using only shareholders funds. Another advantage is that interest payments on debt are allowable against income taxation, whereas dividends are not (Pike et al, 2003). Their view also was that as long as the increases are small and the prospect of default remote, shareholders are unlikely to respond unfavourably to these minor changes. Sooner or later however shareholders may become concerned by the greater financial risk and will seek higher returns for themselves. The greater the possibility of default will also have investors raising their requirements. This series of events will see the WACC (Weighted Average Cost of Capital) rise and the value of the company and the shareholders wealth will fall. "The weighted average cost of a company is calculated using the cost of equity, the cost of debt and the market ...

See this essay or coursework document in full right now