Debt capacity is the maximum proportion of debt the firm can include in its capital structure and still maintain its lowest composite cost of capital.

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Debt capacity is the maximum amount of debt that a company can take on without endangering its financial health or violating loan agreements. It is important for companies to maintain an optimal capital structure, which balances the use of debt and equity to achieve the lowest possible cost of capital. Therefore, debt capacity is the maximum proportion of debt the firm can include in its capital structure and still maintain its lowest composite cost of capital.

Debt Capacity Is the Maximum Proportion of Debt the Firm