Proceedings | Finance area | Year 2019 | |
Optimal Book-Value Debt Ratioby Piyapas Tharavanij | |
the 8th International Conference on Advancement of Development Administration 2019 in
Bangkok, Thailand 23-25 May 2019 |
AbstractWhen a firm has a target capital structure, it is usually in a book-value term rather than a
market-value term as presumed by capital structure theories or finance textbooks. In large
part, this is because it is a book-value debt ratio that bankers, creditors and rating agencies
pay attention to and even put in their loan covenants. The objective of this paper is to
provide a systematic and practical method to determine the optimal corporate book-value
debt ratio. The proposed method balances both the tax benefit of debt and its associated
bankruptcy cost and more importantly incorporate the aims to maintain a good credit
rating, financial robustness in times of adverse shocks and financial flexibility to seize
good investment opportunities. The method could be applied by corporate finance
managers to approximate the optimal book-value debt ratio to maximize a firm value.
Keywords: Capital structure, cost of capital, debt ratio, leverage ratio |