In the real world, the optimal capital structure is 100% debt.
A company's optimal capital structure is the optimal combination of debt and equity financing that maximizes the company's market value while minimizing its cost of capital. In theory, debt financing has the lowest cost of capital as it is tax deductible. However, excess debt increases shareholders' financial risk and the return on equity they require. Firms, therefore, need to find the sweet spot where the marginal utility of debt equals the marginal cost.
According to economists Franco Modigliani and Merton Miller, in an efficient market free of taxes, bankruptcy costs, agency costs, and information asymmetries, a company's value is unaffected by its capital structure.
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