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An EBIT‐Based Model of Dynamic Capital Structure

Robert Goldstein, Nengjiu Ju and Hayne Leland
The Journal of Business
Vol. 74, No. 4 (October 2001), pp. 483-512
DOI: 10.1086/322893
Stable URL: http://www.jstor.org/stable/10.1086/322893
Page Count: 30
Subjects: Business Finance
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An EBIT‐Based Model of Dynamic Capital Structure
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Abstract

A model of dynamic capital structure is proposed. Even though the optimal strategy is implemented over an arbitrarily large number of restructuring‐periods, a scaling feature inherent in the framework permits simple closed‐form expressions to be obtained for equity and debt prices. When a firm has the option to increase future debt levels, tax advantages to debt increase significantly, and both the optimal leverage ratio range and predicted credit spreads are more in line with what is observed in practice.

Notes and References

This item contains 30 references.

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