Question 1 - Part b
In this requirement, you'll learn how to evaluate two competing theories about optimal capital structure: the case for maximising debt versus the risks of excessive leverage.
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In this lesson
- 0:00 Understanding capital structure propositions
- 0:38 Debt financing advantages and tax shields
- 1:54 Modigliani-Miller theory with tax
- 2:12 Risks of excessive debt levels
- 3:36 Finding optimal capital structure
- 4:48 Structuring balanced exam answers
About this lesson
You'll explore why debt is often cheaper than equity (including the tax shield benefit), and understand how high gearing increases financial risk and the cost of equity, ultimately creating a trade-off that companies must balance. This is a core concept in Financial Management and Strategic Business Leader papers, where you'll need to discuss capital structure decisions with reference to both theoretical perspectives and practical business implications. The key is presenting a balanced answer across both propositions with roughly equal depth, supported by around six distinct points to secure full marks.
Duration: 5m
Transcript
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