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.

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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