Optimal leverage with a variable borrowing rate

John McDonald

Applied Economics Letters, 2012, vol. 19, issue 2, 117-121

Abstract: This article is a theoretical examination of optimal leverage to maximize the value of an investment asset, assuming that the interest rate on loans increases with leverage. The expected rate of return to equity for the investing firm (that is subject to taxation at the entity level) and market equilibrium for the model are derived. The amount of risk that is assumed by investing firms that borrow is set by the competitive market. The article also includes a model of the capitalization rate for commercial real estate, defined as net operating income divided by property value (which depends upon leverage).

Date: 2012
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/13504851.2011.568388 (text/html)
Access to full text is restricted to subscribers.

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:taf:apeclt:v:19:y:2012:i:2:p:117-121

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEL20

DOI: 10.1080/13504851.2011.568388

Access Statistics for this article

Applied Economics Letters is currently edited by Anita Phillips

More articles in Applied Economics Letters from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().