The marginal cost of debt in determining the optimal capital structure of Brazilian firms
Published:
Jun 26, 2025
Volume:
23
Keywords:
Capital structure
Trade-off theory
Marginal cost of debt
Abstract
The objective of this study is to identify the marginal cost function of debt that rationalizes the choice of capital structure of Brazilian firms listed on B3. Understanding the behavior of the marginal cost of debt allows us to evaluate the main theories of capital structure and provides managers with a useful model for determining the optimal level of financial leverage. Applying Brazilian income tax rules, marginal tax rates were simulated for each firm-year and for various levels of indebtedness. We thus obtained the marginal benefit curve of the debt. It was assumed as a condition of equilibrium that the marginal benefit curve crosses the marginal cost curve at the observed level of indebtedness, on average. Exogenous changes in the benefit curves then allowed us to identify the marginal cost function of the debt. The marginal cost curve of the debt of Brazilian firms is positively sloped in relation to indebtedness and, for the most part, the effects of the firms' specific factors on the curve are in accordance with the theories of capital structure. In addition, on average, firms are underleveraged, being able to almost double the net benefit of debt and remain financially balanced.
How to cite
Edson Machado Oliveira, Guilherme Kirch. The marginal cost of debt in determining the optimal capital structure of Brazilian firms. Brazilian Review of Finance, v. 23, n. 1, 2025. p. e202510. DOI: 10.12660/rbfin.v23n1.2025.93508.
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