When I am calculating the new cost of capital for the firm's new capital structure using the cost of capital approach, I keep getting that the firm's optimal debt ratio is at 100% (cost of capital decreases from 0% debt ratio to 100% ). the company trades in FTSE 100. Is something wrong in the calculations. (Damodaran, applied corporate finance)

Question

anonymous · Answer

No, that's technically correct under the standard Miller & Modigliani framework since they assume that:
1.) capital markets are perfect & frictionless
2.) There are no costs associated with financial distress

In addition, Debt has the added benefit of being tax-deductible.

Hope this helps!