Tax Shield, Bankruptcy Cost and Optimal Capital Structure

Zhiqiang Zhang ()
Additional contact information
Zhiqiang Zhang: Renmin University of China

Chapter Chapter 5 in Finance – Fundamental Problems and Solutions, 2013, pp 71-108 from Springer

Abstract: Abstract This chapter tries to solve the problem of optimal capital structure. After redefining the concepts of tax shield and bankruptcy cost, based on the MM models and Black-Scholes model, this chapter derives the ZZ tax shield model and the ZZ bankruptcy cost model, and finally solves the problem of optimal capital structure by deriving the ZZ optimal leverage model or the ZZ optimal capital structure model. The ZZ leverage model reveals that there is indeed an optimal debt ratio for every firm on certain time, but the value-added from optimizing its debt ratio is very limited. Just as other ZZ model series, the forms and the variables of the ZZ model series on leverage are also derived via strict logic processes rather than chosen subjectively. Hence, the ZZ model series on leverage can be easily extended to accommodate various decision situations and more conditional factors, such as abnormal growth, bankrupt expectancy, debt guarantee, transaction cost, personal income tax, etc. and can as well be used to explain better most of the other long-lasting capital structure puzzles.

Keywords: Capital Structure; Debt Ratio; Risk Free Rate; Leverage Ratio; Debt Financing (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:spbrcp:978-3-642-30512-2_5

Ordering information: This item can be ordered from
http://www.springer.com/9783642305122

DOI: 10.1007/978-3-642-30512-2_5

Access Statistics for this chapter

More chapters in SpringerBriefs in Business from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().