Influence of Tax Shields, Default Risk and Transaction Costs on the Average Cost of the Capital

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 6, 67-79

Abstract: The work purpose is a construction of the theoretical model for an estimation of possible joint influence of tax shields, default risk and transaction costs on the average cost of the capital, taking into account the results of classical works of Myers, Fama and French. Transaction costs are estimated as a difference between bond yield at issue and bond market yield. It is shown that the capital structure practically does not depend on tax shields, but essentially depends on transaction costs and default risk. The optimal capital structure is reached at the level of a debt equal to the maximal safe size.

Keywords: default risk; transaction costs; pecking order model; trade-of model; capital structure; WACC (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:fru:finjrn:150607:p:67-79

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