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optimal gearing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › optimal gearing

  • This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
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  • March 1, 2021 at 12:14 pm #612318
    Jiya024
    Member
    • Topics: 168
    • Replies: 56
    • ☆☆☆

    sir is there any major difference between static trade-off theory and optimal gearing structure theory(traditional view). aren’t both of them trying to convey the same thing?

    that if the target debt ratio is exceeded then increasing gearing will lead to increase in WACC.
    and as long as gearing is below target debt ratio, gearing can be increased as the debt is not only cheaper than equity(due to lower risk attached) but also has tax shield.

    March 1, 2021 at 3:32 pm #612371
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 51582
    • ☆☆☆☆☆

    Yes – the static trade off theory is the traditional theory and what you have written follows on from that.

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