Capital structure with firm’s net cash payouts

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.