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Capital structure with firm’s net cash payouts

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Flavia Barsotti

    (University of Pisa, Department of Statistics and Applied Mathematics)

  • Maria Elvira Mancino

    (University of Firenze, Department of Mathematics for Decisions)

  • Monique Pontier

    (University of Paul Sabatier, Institute of Mathematics of Toulouse)

Abstract

In this paper a structural model of corporate debt is analyzed following an approach of optimal stopping problem. We extend Leland model introducing a dividend δ paid to equity holders and studying its effect on corporate debt and optimal capital structure. Varying the parameter δ affects not only the level of endogenous bankruptcy, which is decreased, but modifies the magnitude of a change on the endogenous failure level as a consequence of an increase in risk free rate, corporate tax rate, riskiness of the firm and coupon payments. Concerning the optimal capital structure, the introduction of dividends allows to obtain results more in line with historical norms: lower optimal leverage ratios and higher yield spreads, compared to Leland’s results.

Suggested Citation

  • Flavia Barsotti & Maria Elvira Mancino & Monique Pontier, 2012. "Capital structure with firm’s net cash payouts," Springer Books, in: Cira Perna & Marilena Sibillo (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 19-26, Springer.
    • Handle: RePEc:spr:sprchp:978-88-470-2342-0_3
    DOI: 10.1007/978-88-470-2342-0_3
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