Analytical Solution for Optimal Capital Structure in Perpetuities
7 Pages Posted: 15 Dec 2010 Last revised: 19 Oct 2011
Date Written: December 14, 2010
We derive and present the formula for optimal debt under the assumption that tax shields are discounted at the cost of levered equity, Ke and cash flows are on perpetuity. The formulation is consistent and is derived from basic financial principles. This formulation is valid for non-growing perpetuities.
Keywords: Firm valuation, optimal capital structure, discount rate for tax shields
JEL Classification: M21, M40, M46, M41, G12, G31, J33
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