Question

Why is firm value maximised somewhere between 0% and 100% debt?

Answer 1

Firm value is maximized because the debt capital is always associated with providing tax deduction benefits to the interest expenses and interest expenses are always to be adding to the value of the company.

when there is a large amount of debt capital into the overall capital structure, it means that there would be a higher tax deduction on the part of interest payments and that would lead to growth in the value of the overall company

when there is a higher corporate tax structure as well that would mean that the higher would be the taxes on the debt capital payments the form of interest and then when there is a higher debt capital, it mean that there would be higher addition to the overall tax deduction in the form of interest, so there would be an increase in the overall value of the company as the amount of debt in the total capital structure grows.