8.6 Summary: Financial Leverage and Capital Structure

Students are very often disappointed to learn that there are no answers to the big questions. The ideal ratio of debt to equity depends on the industry, the company, its managers, and shareholders. While we may have some metrics that are indicative of one or more of the foregoing characteristics, we cannot quantify the “ideal” capital structure.  We are now certainly aware of the pros and cons of too little or too much debt. The fallback notion is that the ideal capital structure is the company’s current structure; otherwise, the corporation would not have chosen it. That is tough for many to buy into, especially in a dynamic world.

In the end, the best financial managers are those who are most adept at coping with uncertainty, and incomplete, or faulty, models. That’s life.