Question

We can interpret the the optimal level of debt as the firm's _, or the highest amount the firm can borrow before the value of the firm begins to decline.

Answer 1

Hello so i will try to explain the concept to you.

What level of debt is optimal for a firm depends on many factors. Most importantly on cost of capital or WACC.

WACC depends on the cost of debt and cost of equity. Cost of debt is lower than equity.

But as you increase the debt the equity starts becoming risky and the cost of equity also increases. Thereby instead of lowering your cost of capital your cost of capital increases with increasing debt.  

Demonstrating the same through a graph of cost of debt.  

So one can say that optimal level of debt as the companies cost of capital is lowest rather than borrowing as much as possible.

hope this clarifies. Let me know if you need any more clarification. Also please upvote it. would really appreciate that.