Page 360 - FM Integrated WorkBook STUDENT 2018-19

Chapter 18

4.2 Traditional view conclusions

Shareholder wealth is affected by changing the level of gearing.

There is an optimal gearing ratio at which WACC is minimised and the
total value of the company is maximised.

Financial managers have a duty to achieve and maintain this ratio.

While we accept that the WACC is probably U shaped for entities
generally, we cannot precisely calculate a best gearing level.

The optimum level will differ from one entity to another and can only be
found by trial and error.

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