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Why do firms target their capital gearing ratio within a defined range instead of piling-up cheaper loan finance to lower their WACC?
Some may do, but it is not a rule!
It is because although M&M say that the more debt the better (because of the tax relief on the interest), M&M make many assumptions that are not necessarily true in real life.
Although more debt is attractive because of the tax relief, at the same time it makes things more risky for the shareholders. For that reason they are likely to decide on a level of gearing to aim for.You really need to watch the free lectures on this where I do discuss it.
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