Analytical Solution for Optimal Capital Structure in Perpetuities

7 Pages Posted: 15 Dec 2010 Last revised: 19 Oct 2011

Joseph Tham

Duke University - Duke Center for International Development in the Sanford School of Public Policy

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

James W. Kolari

Texas A&M University, Department of Finance

Date Written: December 14, 2010

Abstract

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.

Keywords: Firm valuation, optimal capital structure, discount rate for tax shields

JEL Classification: M21, M40, M46, M41, G12, G31, J33

Suggested Citation

Tham, Joseph and Velez-Pareja, Ignacio and Kolari, James W., Analytical Solution for Optimal Capital Structure in Perpetuities (December 14, 2010). Available at SSRN: https://ssrn.com/abstract=1725527 or http://dx.doi.org/10.2139/ssrn.1725527

Joseph Tham (Contact Author)

Duke University - Duke Center for International Development in the Sanford School of Public Policy ( email )

Box 90312
302, Towerview Dr, Rubenstein Hall, Room 272
Durham, NC 27708
United States
919-613-9234 (Phone)
919-681-0831 (Fax)

HOME PAGE: http://fds.duke.edu/db/Sanford/faculty/thamjx

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

James W. Kolari

Texas A&M University, Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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