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Chapter 18: Capital Structure
Learning objectives
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The level of debt relative to ordinary share capital is, for most firms, a secondary consideration behind strategic and operational decisions. However, if wealth can be increased by getting this decision right managers need to understand the key influences. After working through this chapter you should be able to:
- discuss the effect of gearing, and differentiate business and financial risk;
- describe the underlying assumptions, rationale and conclusions of Modigliani and Miller's models, in worlds with and without tax;
- explain the relevance of some important, but often non-quantifiable, influences on the optimal gearing level question.
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