For the financial manager who cannot decide on a suitable level of gearing, which of the following is the best guideline?
A) Keep gearing to a minimum
B) Aim to achieve the maximum possible levels of gearing
C) Adopt the gearing used by average firms in the industry
D) Gear at the level of tax exhaustion

Question

Quizplus · Accepted Answer

Adopting the gearing used by average firms in the industry can help the financial manager benchmark their level of gearing against competitors and ensure they are not overly conservative or aggressive in their capital structure decisions. Keeping gearing to a minimum may limit the firm's ability to take advantage of growth opportunities, while aiming for the maximum level of gearing may introduce excessive financial risk. Gearing at the level of tax exhaustion may result in the firm taking on too much debt and facing financial distress.

For the Financial Manager Who Cannot Decide on a Suitable