According to Modigliani and Miller, what is the suggested approach to gearing?

The concept of gearing, or leverage, plays a critical role in understanding a company's capital structure and financing decisions. Modigliani and Miller proposed that in a perfect market—where there are no taxes, bankruptcy costs, or other frictions— the value of a firm is unaffected by its capital structure, which means that the level of gearing is irrelevant to the business. Their seminal work in corporate finance provided the foundational theory that the financing mix of debt and equity does not impact a company’s overall value.

This principle suggests that whether a firm is financed through debt or equity will not change its market capitalization. Therefore, increasing or decreasing gearing (i.e., the ratio of debt to equity) does not inherently raise or lower the value of the firm in a frictionless environment. This leads to the conclusion that companies should make financing decisions based on operational needs and personal preferences rather than concerns about the implications of their leverage on total value.

The other suggested approaches implicitly acknowledge a relationship between gearing and the firm's value, which contradicts Modigliani and Miller’s assertion in their theorem about the irrelevance of capital structure. Hence, the idea that gearing is irrelevant captures the essence of their theory perfectly.