1. avatar says

    Hi sir I’ve a question
    A company can maximise its value by adopting a capital structure that minimises it’s weighted average cost of capital .could you please explain whether or not such an optimal capital structure exists for a company.
    Many thx

    • Profile photo of John Moffat says

      In practice yes – because the WACC stands to change as the gearing changes.

      In theory (according to Modigliani and Miller) then without tax the WACC will not change and so there is no such thing as optimal gearing; but with tax then there is an optimal – they should be as highly geared as possible because this will reduce the WACC. I do explain and illustrate this in the lectures.

      (M&M may not work perfectly in practice because of the various assumptions they made, which do not all hold true because things don’t work perfectly in real life)

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