Analytical Solution for Optimal Capital Structure in Perpetuities
Duke University - Duke Center for International Development in the Sanford School of Public Policy
Grupo Consultor CAV Capital Advisory & Valuation
James W. Kolari
Texas A&M University
December 14, 2010
We derive and present the formula for optimal debt under the assumption that tax shields are discounted at the cost of levered equity, Ke and cash flows are on perpetuity. The formulation is consistent and is derived from basic financial principles. This formulation is valid for non-growing perpetuities.
Number of Pages in PDF File: 7
Keywords: Firm valuation, optimal capital structure, discount rate for tax shields
JEL Classification: M21, M40, M46, M41, G12, G31, J33
Date posted: December 15, 2010 ; Last revised: October 19, 2011
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