Gearing investments with uncertainty

Abstract

Purpose – The purpose of this paper is to outline a method for evaluating gearing ratios when the loan rate and the rate of growth of the asset value are subject to severe uncertainty. Design/methodology/approach – Gearing ratios often are determined without any explicit methodology to deal with uncertainty. A simple system is designed that includes uncertainty in loan and growth rates and Wald's maximin criterion to evaluate options is used. The paper shows its numerical interpretation, provide a nomogram to facilitate its use, and link it to some recent decisions by listed companies. Findings – The method outlined here provides an explicit mechanism to consider uncertainties in rates that ..