 In modic Lenny and Miller's settings of perfect capital market the firm could use any combination of equity and debt in its capital structure and it did not change the value of firm So this means that Any combination of capital structure the firm could use was the optimal capital structure Now the question arises do the firms prefer to use debt In fact US firms in the recent year have negative aggregate equity This means that many of these firms have sold equity to raise funds and The other firms were using the funds for the buying or repurchase of Their own share capital But that does not mean that all of the firms were using debt to finance internal funds We see that there is a clear preference of usage of debt as a source of external financing by these US firms in Total the firms borrowed beyond their need for Internal usage to repurchase equity capital if we see the graph on the screen We can see that there is an issuance of new equity excluding the equity is retired and there is a line in red that is showing the debt amount issuing with the new borrowings Excluding the loans repaid this graph shows that firms are raising new capital from the investors primarily to debt and This shows that US firms preferring debt as a source of external finance Then these funds were used to retire equity and finance the investments of the firms and we see that a vast majority of capital expenditure are Internally funded by these US firms although the firms have not issued any new equity However, the market value of the equity has risen over time as the firms have grown We are seeing and other graph that is showing the debt to enterprise value ratio for selected industries For the period of 2015 we see that this figure is showing the industry medians of net debt to and total debt as a fraction of the firms enterprise value We see that there are large differences in net leverage across industries across the board the spread between These differences shown by blue bars as we can see here these Corresponds to the cash holdings by these firms for example these biotech firms Tend to have no debt, but they are holding a great amount of cash And so these biotech industrial firms have negative net debt These firms leverage ratios differ due to the related industries Let's see the relationship between growth and debt In optimal tax optimal capital structure it is the habit that drives the interest payments of a firm For example, a loss earning R&D firm will be working with equity base only Because for such a firm tax optimal capital structure does not exist This type of firm will be using debt only in a future when its operations becomes profitable And the firm has taxable cash flows Also the optimal leverage ratio of a firm with Positive earning may also be affected by its growth rate And under such conditions what care such type of firm should observe This firm should try to Maintain its interest payment well below its Abit or in other words the interest payment of such type of firms should not go beyond its Abit Optimal debt level from a tax perspective is basically proportional to the firm's current earnings But a firm's equity solely depends upon the growth rate of its earnings This means that if the growth rate of the earnings of the firms are higher Then the value of equity of such firm will also be higher And as a result the earning multiples of such type of firms will go on Higher side also This means that a low optimal proportional of debt in capital structure will be observed by such type of firms in the market Apart from interest as a tax shield there are also other sources from where tax savings on debt side can be Obtained using provisions available in the tax laws like depreciation investment credits And carry forward of the firms operating losses in the past years