Candidates were asked to discuss whether changing a company’s capital structure could reduce its cost of capital and hence increase its value.

Better answers recognised that the question was directed at section F5 of the Study Guide, which refers to capital structure theories and practical considerations, and responded with a discussion that considered the theories and concepts found there.

These theories were the traditional view, the views of Miller and Modigliani, and the market imperfections view. Pecking order theory was not relevant to the question asked. Relevant concepts included business risk, financial risk, gearing, the problems of high gearing and so on.

Weaker answers focused on the relative risk and return of equity and debt finance, making little or no reference to the theories and concepts mentioned above. Weaker answers also tended to be somewhat brief for the marks on offer.