The Journal oj Finance amount. If the firm cannot .meet its debt obligation, it is forced into bankruptcy and incurs the associated penalties. Robichek and Myers [12, p. 20] have noted that the optimization of capital structure involves a tradeoff between "the present value of the tax rebate associated with a marginal increase in leverage . . . [and] the present value of the marginal cost of the disadvantages of leverage." Similarly, Hirshleifer has suggested that "even within complete capital markets, allowing for considerations such as taxes and bankruptcy penalties would presumably permit the determination of an optimal debt-equity mix for the firm." [7, p. 264J,! The present paper formally introduces corporate taxes and bankruptcy penalties into a single-period valuation model in a complete capital market. The firm's financing mix determines the states in which the firm will earn its debt obligation and receive the tax savings attributable to debt financing. The firm's financing mix also determines the states in which the firm is insolvent and incurs bankruptcy penalties. The problem of optimal capital structure is, therefore, formulated as the determination of that level of debt such that the resulting division of states (into those in which the
The Journal of Finance – Wiley
Published: Sep 1, 1973
It’s your single place to instantly
discover and read the research
that matters to you.
Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.
All for just $49/month
Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly
Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.
Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.
Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.
All the latest content is available, no embargo periods.
“Hi guys, I cannot tell you how much I love this resource. Incredible. I really believe you've hit the nail on the head with this site in regards to solving the research-purchase issue.”Daniel C.
“Whoa! It’s like Spotify but for academic articles.”@Phil_Robichaud
“I must say, @deepdyve is a fabulous solution to the independent researcher's problem of #access to #information.”@deepthiw
“My last article couldn't be possible without the platform @deepdyve that makes journal papers cheaper.”@JoseServera