Bb

8.80%

27.19%

6.41%

7.76%

$66,966

The optimal debt ratio is the point at which the firm value is maximized. Note that the cost of capital is actually minimized at 70% debt but the firm value is highest at a 40% debt ratio. This is so because the operating income changes as the debt ratio changes. While the cost of capital continues to decline as the debt ratio increases beyond 40%, the decline in operating income more that offsets this drop.

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