When a firm is operating with the optimal capital structure, the increased benefit from additional debt is equal to the increased bankruptcy costs of that debt.

Question

Quizplus · Accepted Answer

At the optimal capital structure, the marginal benefit of debt (such as tax shields) is exactly offset by the marginal cost (such as increased bankruptcy risk), leading to a balance where the firm's value is maximized.

When a Firm Is Operating with the Optimal Capital Structure