What does capital-structure theory (trade-off vs pecking order) say about how much debt a company should carry?

Modigliani-Miller showed that in a frictionless world capital structure is irrelevant — value comes from assets, not financing. Real frictions then drive the answer. Trade-off theory says firms balance the tax shield benefit of debt (interest deductibility raises value) against the rising costs of financial distress and bankruptcy as leverage grows, plus agency costs — implying an optimal, target leverage where the marginal tax benefit equals the marginal distress cost. Pecking-order theory says firms prefer internal funds first, then debt, and issue equity last, because of information asymmetry (issuing equity signals overvaluation), so leverage reflects cumulative financing needs rather than a target. In practice both operate: firms have rough target leverage (consistent with trade-off and rating considerations) but follow a pecking order period to period. For a treasurer this translates to a financial policy: a target leverage/rating that captures tax benefits without jeopardizing the rating, liquidity, or covenant headroom, adjusted for cash-flow stability, asset tangibility, and investment needs.