Question

Is there an easily identifiable debt–equity ratio that will maximize the value of a firm? Why or why not?

Answer 1

No, The statement is Not True

Debt-Equity ratio refers to the ratio of the debt and the equity used by the company to finance the company capital, The Cost of debt and the cost of equity is usually different and this makes up the Weighted average cost of capital which refers to the weighted cost that the company has to pay to the borrowers in return of the amount borrowed.

The Company Can't easily determine the debt-equity ratio that will maximise the value of the firm because there are various costs that are involved like the taxes percentage, bankruptcy, agency and Inflation which could affect the return demanded by the shareholders and interest paid to the debtors. However, company can raise new debt or sell existing debt if the market prevailing rate is different, which will helps to optimize the debt-equity ratio thus the Weighted average cost of capital.