In the absence of bankruptcy and agency costs and signaling actions, tax deductibility of interest payments implies that the optimal debt ratio should be:
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A. B. C. D.C
If there are no costs to increased debt, such as bankruptcy costs, and no signaling effects in a firm's decisions about the capital structure, then a firm would try to maximize the benefits of the debt shield i.e. the deductibility of interest payments. This implies a debt ratio of 100%.