One of the more interesting things in my textbook. I did a lot of studying today. Since debt creates a favorable tax shelter, more debt in a corporation is theoretically good. However, as debt increases, probability of bankruptcy and other financial distress increases. Therefore, an optimal debt ratio can be found at a certain proportion of debt to overall capital. Get it? Got it? Good.
Other astute readers may also notice that the above picture is simply a hammock.
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