Aaa

0.70%

0.00%

Thus, we assume that the operating income will drop 5% if Deutsche Bank's rating drops to AA and 20% if it drops to BBB. The drops in operating income were estimated by looking at the effects of ratings downgrades on banks22.

Based upon these assumptions, the optimal long term debt ratio for Deutsche Bank is estimated to be 40%, lower than it's current long term debt ratio of 67%. Table 8.17 below summarizes the cost of capital and firm values at different debt ratios for the firm.

Table 8.17: Debt Ratios, Cost of Capital and Firm Value: Deutsche Bank

Debt Ratio

Beta

Cost of Equity

Bond Rating

Interest rate on debt

Tax Rate

Cost of Debt (after-tax)

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