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Optimal Capital Structure for Finite Cash Flows

Felipe Mejia-Pelaez

Ekkeko SA

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

James W. Kolari

Texas A&M University, Department of Finance

March 30, 2011

La versión española de este artículo se puede encontrar en: http://ssrn.com/abstract=1826264

This paper shows how to proceed to find the optimal capital structure and value with period-to-period constant and variable leverage, when the discount rate for tax shields is Ke, the cost of levered equity. Numerical procedures and recursive closed-form non-circular expressions for the finite-period and perpetuity cases are presented, which facilitate any kind of implementation including Monte Carlo simulations.

En este trabajo se muestra cómo encontrar la estructura óptima de capital y el valor con un endeudamiento constante y variable período a período, cuando la tasa de descuento para el ahorro de impuestos es Ke, el costo de capital apalancado. Se presentan procedimientos numéricos y expresiones recursivas compactas no circulares para los casos de períodos finitos y perpetuidades, lo que facilita el cálculo y el análisis, incluyendo simulaciones de Monte Carlo. Asimismo, se ilustra el procedimiento en hoja de cálculo con Solver como una verificación.

See a related PowerPoint slides that accompany and complement this paper at: Blind Man's Buff: On the Search of the Optimal Capital Structure

Number of Pages in PDF File: 38

Keywords: Optimal capital structure, valuation, non-circularity, finite cash flows, perpetuities tax shield, cost of equity

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

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Date posted: April 2, 2011 ; Last revised: November 16, 2013

Suggested Citation

Mejia-Pelaez, Felipe and Velez-Pareja, Ignacio and Kolari, James W., Optimal Capital Structure for Finite Cash Flows (March 30, 2011). Available at SSRN: https://ssrn.com/abstract=1799605 or http://dx.doi.org/10.2139/ssrn.1799605

Contact Information

Felipe Mejia-Pelaez
Ekkeko SA ( email )
Carrera 35A 5A-170
Apt 1201 - Edificio Catay 8
Medellín, Antioquia
Ignacio Velez-Pareja (Contact Author)
Grupo Consultor CAV Capital Advisory & Valuation ( email )
Ave Miramar # 18-93 Apt 6A
+573112333074 (Phone)
HOME PAGE: http://cashflow88.com/decisiones/decisiones.html
James W. Kolari
Texas A&M University, Department of Finance ( email )
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

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