Question

I am trying to calculate the optimal capital structure of a firm. The company i am using has zero EBIT value,how can i go about it.

Answer 1

It can be chosen according to industry average but you must care for a size of predicted EBITs. The predicted values of EBIT couldn't be lower than interest expenses on debt.

Answer 2

Tara,
If you have zero operating income (EBIT), why would you want to borrow money in the first place. Your optimal debt ratio is zero.

Answer 3

Aswath, I see your point and agree. To get funding, the firm (not Tara) should issue equity, by diluting the current owner's share of the pie. However the pie (post-money) will likely become larger, else no one will be ready to fund.

Answer 4

I got it.The optimal debt ratio is zero because there is no tax benefit from borrowing money, if you do not have a positive operating income.