Optimal capital structure-understand this?

CFA Level II
#1

So this is question 4 on ECO reading 24

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so the answer is c. Now I can understand how this can be the answer, but is there a equation that can help me understand the fundamental idea about optimal range of D/E ratio better, or we can just saay with static trade off theory the capital cost is higher then it is definitely not optimal? I am having trouble comprending the whole financial diastress cost thing i guess

#2

The WACC as a function of D/E is a U-shaped curve. It goes down up to a point, then starts climbing again. If you increase debt and the WACC goes up, then you are past the optimal point.

#3

Also, when you increase debt, then cost of equity goes up, and the best explanation is that you have gone beyond the optimal capital structure