Overview

In this lesson

1. 0:00 Capital structure theories overview
2. 0:23 Understanding gearing and financial ratios
3. 1:44 Operational gearing explained
4. 2:13 Risk implications of high gearing
5. 3:19 Debt versus equity financing costs
6. 4:07 Finding the optimal capital structure balance

About this lesson

You'll explore the key gearing ratios—debt to equity, financial gearing, and operational gearing—and understand why the relationship between debt and equity matters for your organisation's cost of capital and financial risk. The video explains why debt is typically cheaper than equity (because lenders face lower risk) and why this doesn't mean companies should use only debt financing. You'll discover the critical concept of the "sweet spot"—the optimal balance between debt and equity that minimises your weighted average cost of capital without making the business too risky or limiting future financing options. This foundational understanding of capital structure underpins the theories you'll study in depth throughout this module. This lesson is core to Advanced Financial Management and Strategic Business Leader papers, where you'll apply these principles to real business decisions and case studies. Grasping these concepts now will help you evaluate financing decisions confidently and understand why organisations make the capital structure choices they do.

Duration: 5m