It was pointed out that market imperfections associated with high levels of gearing, such as bankruptcy risk and agency costs,would limit the extent to which a company could gear up. In practice, therefore, it appears that companies can reduce their
WACC by increasing gearing, while avoiding the financial distress that can arise at high levels of gearing.
Time allowed
Reading and planning: 15 minutes
Writing: 3 hours a
ALL FOUR questions are compulsory and MUST be attempted.
Formulae Sheet, Present Value and Annuity Tables are on
pages 6, 7 and 8.
Do NOT open this paper until instructed by the supervisor. P
During reading and planning time only the question paper maybe annotated. You must NOT write in your answer booklet untilinstructed by the supervisor.
This question paper must not be removed from the examination hall.
The Association of Chartered Certified Accountants
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