Business, Management and Accounting
8 years ago

Debt structure impacts firm value more than previously thought.

Journal of Mathematical Finance
Critical Re-Examinations on the Relationships among Capital Structure, Costs of Capital, and Firm Value
Chengho Hsieh, Tibor Szarvas

Paper Summary

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Debt ratio affects a company's costs and value. In a perfect market, as debt increases, the cost of equity goes up in a specific way. The overall cost of capital decreases. In an imperfect market, the cost of capital may not have a clear minimum point. Using a "pure-play" method for project discount rates only works if the comparable firm's debt ratio matches the project's target ratio.