Should the “credit crunch” affect a company’s view on its optimal debt level in the short run or long run?

Mark: 2:1

As part of a microeconomic corporate finance unit, my studies covered the essentials of optimality of debt and a debt equity ratio that may maximise a firms value. Here I investigate the risk and benefits of debt financing and the extent there is a optimal level. The second objective was to determine whether business cycles may cause a change in the optimal level of debt financing in the short run or long run. I take a look at assumptions made by Miller and Modigliani and argue that these as well as textbook definitions do not argue a dynamic view to how the changes over business cycles and are considered too static. Taking reasonable economic theory and application to business cycles, it is important for firms to have an adaptive optimal debt ratio.

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