Real world capital structure
Taught by Ben Wilson · AI tutor support included
You'll learn why real-world capital structures differ from Modigliani and Miller theory and what practical factors actually drive companies' gearing decisions.
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In this lesson
- 0:00 Capital structure in the real world
- 0:50 Criticisms of Modigliani-Miller theory
- 1:37 Debt capacity and covenant constraints
- 2:42 Cost of debt rising with gearing
- 3:38 Tax exhaustion and practical limits
- 4:51 Practical influences on gearing levels
- 5:18 Business risk and equity preference
- 6:25 Life cycle stage and debt access
- 7:25 Operating gearing and cost structure
- 8:40 Asset quality and lending decisions
- 9:09 Exam question: Mickie's expansion funding
About this lesson
This video moves beyond formulas to explore the criticisms of M&M models—including debt capacity constraints, rising debt costs at high gearing levels, and tax exhaustion—and explains why an optimal capital structure sweet spot exists in practice. You'll discover how business risk, company lifecycle stage, operating gearing, and asset quality influence whether a business should raise equity or debt funding, then apply these concepts to an exam-style analysis question that shows how these principles are tested in CIMA and ACCA papers.
Duration: 13m
Transcript
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