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


Cost of Equity

Bond Rating

Interest rate on debt

Tax Rate

Cost of Debt (after-tax)

Bank Loan Busters

Bank Loan Busters

There are many physical and mental implications when one is in debt, especially if the said debt is of a considerable amount. Many people don’t realize the extent these implications can have both in the long term and short term. Therefore careful consideration should be given to the following to understand just how debt impacts one’s life.

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