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Analytical Solution for Optimal Capital Structure in Perpetuities

Author

Listed:
  • Joseph Tham
  • Ignacio Velez Pareja
  • James Kolari

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.

Suggested Citation

  • Joseph Tham & Ignacio Velez Pareja & James Kolari, 2011. "Analytical Solution for Optimal Capital Structure in Perpetuities," Proyecciones Financieras y Valoración 7857, Master Consultores.
    • Handle: RePEc:col:000463:007857
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    More about this item

    Keywords

    Firm valuation; optimal capital structure; discount rate for tax shields;
    All these keywords.

    JEL classification:

    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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