Traditional view
You'll learn the traditional view of capital structure and why organisations have an optimal level of debt that minimises their weighted average cost of capital.
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In this lesson
- 0:00 Traditional view of capital structure
- 0:18 Why initial debt reduces WACC
- 0:48 How rising gearing increases risk
- 1:21 Graphing WACC against gearing levels
- 1:50 Finding the optimal capital structure
- 2:29 Key assumptions in traditional theory
About this lesson
This video explains the key principle that while debt is cheaper than equity finance, taking on too much debt increases financial risk and raises the cost of equity, eventually cancelling out the initial savings. You'll see how this plays out on a graph, understand the sweet spot for gearing, and explore the assumptions underlying this theory—all essential for understanding capital structure decisions in FM and AFM.
Duration: 3m
Transcript
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