Maximum Debt-Equity Ratio: What ratio of debt to equity maximizes the shareholders' interests?

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Expert Solution

Generally there is no fixed Debt- Equity ratio that can defined the maximum or provide the maximum return to shareholder. For maximisation of shareholders interest there should be mix of all type of finance such as Equity, Prefered stock, Debt and Retained Earnings.

But for purpose if we assume if in company there is no prefered stock or retained earnings so in that case Debt- Equity ratio should not be more than 2:1. That means for amount = $2 debt there should amount =$1 of equity.

Conclusion for best return to shareholder debt-equity ratio higher the debt-equity ratio return will be higher to shareholder example in pic where you can see maximum debt will maximum the return of shareholder.

jeff jeffy answered 1 month ago

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