International Journal of Financial Management

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A Precisely Practical Measure of the Total Cost of Debt for Determining the Optimal Capital Structure and the Weighted Average Cost of Capital


Affiliations
1 Department of Accounting and Finance, Oakland University, United States
     

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This paper develops a precise method of estimating the cost of debt to a firm that is based on standard financial theories and empirical evidence on default risk and financial distress costs. An analysis with current data on the S&P 500 demonstrates that the capital structures of large firms are consistent with the model’s simple implications.

Keywords

Capital Structure, Cost of Capital, Cost of Debt.
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  • A Precisely Practical Measure of the Total Cost of Debt for Determining the Optimal Capital Structure and the Weighted Average Cost of Capital

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Authors

Austin Murphy
Department of Accounting and Finance, Oakland University, United States

Abstract


This paper develops a precise method of estimating the cost of debt to a firm that is based on standard financial theories and empirical evidence on default risk and financial distress costs. An analysis with current data on the S&P 500 demonstrates that the capital structures of large firms are consistent with the model’s simple implications.

Keywords


Capital Structure, Cost of Capital, Cost of Debt.

References