Abstract
This study develops a dynamic model of optimization of the value of the company following the postulates of the theory of Trade-Off. The model includes Bystrom formulation for calculating the cost of bankruptcy in the search the optimal debt. Our model is innovative in several respects: 1) raises calculate the cost of bankruptcy easily. This model is easy to implement in firms 2) calculates the cost of debt endogenously. 3) The calculation is dynamic. We determine the cost of debt and the cost of capital for each unit of additional debt. The proposed model has been applied to the companies that make up the Dow Jones Industrial Average (DJIA) in 2007. We have used consolidated financial data from 1996 to 2006, published by Bloomberg. We have used simplex optimization method to find the debt level that maximizes firm value. Then, we compare the estimated debt with real debt of companies using statistical nonparametric Mann-Whitney. The results indicate that 63% of companies do not show a statistically significant difference between the real and the estimated debt.
Highlights
If there is one subject that both fascinates and frustrates financial theorists and researchers, it is capital structure
The proposed model has been applied to the companies that make up the Dow Jones Industrial Average (DJIA) in 2007
The other school of thought put forth by Myers [3] states that there is no optimal level of debt versus equity because transaction costs and asymmetrical information erase any value of tax benefit to debt
Summary
If there is one subject that both fascinates and frustrates financial theorists and researchers, it is capital structure. The first avenue, which directly followed the MM proposition line, has been attempting to find a relationship between the tax benefit of debt, the cost of bankruptcy and the optimal level of debt versus equity of a firm This line of thought is commonly known as Trade-Off Theory. The other school of thought put forth by Myers [3] states that there is no optimal level of debt versus equity because transaction costs and asymmetrical information erase any value of tax benefit to debt Under these circumstances, companies prefer internal financing and will only move to debt and equity issues as they run out of option in their preferred means of financing. Mathematical models put forth have been Trade-Off model related, as the Pecking Order Theory is more a descriptive theory of observed behavior of companies
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
