Finding an Optimal Capital Structure under Default Risk

Pavel E. Zhukov ()
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Pavel E. Zhukov: Financial University under the Government of the Russian Federation

Finansovyj žhurnal — Financial Journal, 2015, issue 2, 60-72

Abstract: The article offers a practical way to introduce default risk in the Modigliani-Miller theory and deduces the theorem of optimal capital structure, which is similar to the Modigliani-Miller last theorem, but taking into account default risk. Separately the author provides the amendments of default risk to required income on debt and equity. The major outcome is that the classical Modigliani-Miller theory is true, but only when the debt does not exceed safe level, while the interest demanded by creditors does not change and the optimum structure of the capital probably is reached at the size of a debt equal to maximum safe level.

Keywords: Modigliani-Miller theory; default risk; discounting rate; probability of default; required income on the debt; required income on equity; weighted average price of the capital; optimum capital structure (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:fru:finjrn:150207:p:60-72

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