International Journal of Financial Management

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

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
     

   Subscribe/Renew Journal


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.
Subscription Login to verify subscription
User
Notifications
Font Size

  • Acharya, V., Almeida, H., Ippolitr, F., & Perez, A. (2014). Credit lines as monitored liquidity insurance: Theory and evidence. Journal of Financial Economics, 112(2014), 287-319.

  • Almeida, H., & Philippon, T. (2007). The risk-adjusted cost of financial distress. Journal of Finance, 62(2007), 2557-2586.

  • Altman, E. (1968). Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. Journal of Finance, 23(1968), 589-609.

  • Avramov, D., Chordia, T., Jostova, G., & Philipov, A. (2013). Anomalies and financial distress. Journal of Financial Economics, 108(2013), 139-159.

  • Bergman, Y., & Callen, J. (1995). Rational deviations from absolute priority rules. International Review of Financial Analysis, 4(1995), 1-18.

  • Black, F., & Scholes, M. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81(1973), 637-654.

  • Callaghan, J., & Murphy, A. (1998). An empirical evaluation of the forecasting power of fundamental stock analysis models over time. Journal of Research in Finance, 2(1998), 138-157.

  • Daniels, K., Ejara, D., & Vijayakumar, J. (2009). An empirical analysis of the determinants and pricing of corporate bond clawbacks. Journal of Corporate Finance, 15(2009), 431-446.

  • Dong, M., Hirshleifer, D., & Teoh, S. (2012). Overvalued equity and financing decisions. Review of Financial Studies, 25(2012), 3645-3683.

  • Elkamhi, R., Ericsson, J., & Parsons, C. (2012). The cost and timing of financial distress. Journal of Financial Economics, 105(2012), 62-81

  • Fu, L., Murphy, A., & Benzschawel, T. (2015). Systematic risk and yield premiums in the bond market. Journal of Credit Risk 11 (June 2015), 1-40.

  • Gryglewicz, S. (2011). A theory of corporate financial decisions with liquidity and solvency concerns. Journal of Financial Economics, 99(2011), 365-384

  • Jostova, G., & Philipov, A. (2005). Bayesian analysis of stochastic betas. Journal of Financial and Quantitative Analysis, 40(2005), 747-778.

  • Kim, D. (1997). A reexamination of firm size, book-tomarket, and earnings price in the cross-section of expected stock returns. Journal of Financial and Quantitative Analysis, 32(1997), 463-490.

  • Merton, R. (1974). On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance, 29(1974), 449-470.

  • Miller, M. (1977). Debt and Taxes. Journal of Finance 32 (1977), 261-275.

  • Modigliani, F., & Miller, M. (1958). The cost of capital: Corporation finance, and the theory of the investment. American Economic Review, 48(1958), 261-297.

  • Modigilani, & Miller, M. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(1963), 433-443.

  • Mu, C., Wang, A., & Yang, J. (2017). Optimal capital structure with moral hazard. International Review of Economics & Finance, (2017), 326-338,

  • Murphy, A. (1988). A discounted cash‑flow model of fixed-income securities subject to multiple calls. Southern Economic Journal, 55(1988), 21-36.

  • Murphy, A. (1990). Using Bayesian betas to estimate risk‑return parameters: An empirical Investigation. Journal of Business Finance and Accounting, 17(1990), 471-477.

  • Murphy, A. (2000). Scientific investment analysis. Quorum Books: New York.

  • Murphy, A. (2001). Market equilibrium with capital loss deduction options. International Journal of Theoretical and Applied Finance, 4(2001), 783-803.

  • Murphy, A., & Sahu, A. (2001). Empirical evidence of a positive inflation premium being incorporated into stock prices. Atlantic Economic Journal, 29(2001), 177-185.

  • Murphy, A. (n.d.). The Absolute Priority “Rule” (APR) in Bankruptcy: Has It Now Been Enabled by the Courts to Allow Creditors to Liquidate Productively Viable U.S. Corporations?. Business and Bankruptcy Journal (2018 forthcoming).

  • Myers, S. (1984). The capital structure puzzle. Journal of Finance, 39(1984), 575-592.

  • Sharpe, W. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. Journal of Finance, 19(1964), 425-442.

  • Warner, J. (1977). Bankruptcy costs, absolute priority and the pricing of risky debt claims. Journal of Finance, 32(1977), 337-347.


Abstract Views: 337

PDF Views: 1




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

Abstract Views: 337  |  PDF Views: 1

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