The Optimal Capital Structure According to the Static Trade- Off Theory

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Research Paper - The Optimal Capital Structure According to the Static Trade- Off Theory

Unit 6 – Research Paper Submitted by Kinjal Mistry Submitted to Dr. Ole Ruankaew California Intercontinental University Dated: 9th Oct-14

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Research Paper - The Optimal Capital Structure According to the Static Trade- Off Theory Table of Content Introduction of the Optimal Capital Structure According to the Static Trade- Off Theory (STT)………………..3 Main ideas of Static Trade off Theory………………………………………………………………………….....4 The Static Trade-off model………………………………………………………………………………………..4 Factors that influence capital structure of STT…………………………………………………………...……….5 Market value of Firm per STT…………………………………………………………...………………….…….6 My stance about the STT theory…………………………………………………………………………………..7 Major results and evidences……………………………………………………………………………………….8 Correlations between determinants of capital structure and debt ratios in listed companies……………………11 Conclusion…………………………………………………………...……………………………………….….12 References………………………………………………………………………………………………………..13

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Research Paper - The Optimal Capital Structure According to the Static Trade- Off Theory Introduction of the Optimal Capital Structure According to the Static Trade- Off Theory The static trade-off theory, focuses on the benefits and costs of issuing debt, predicts that an optimal target financial debt ratio exists, which maximizes the value of the firm. The optimal point can be attained when the marginal value of the benefits associated with debt issues exactly offsets the increase in the present value of the costs associated with issuing more debt as per Myers (2001). The benefits of debt are the tax deductibility of interest payments. The tax deductibility of corporate interest payments favors the use of debt. This simple effect however, can be complicated by the existence of personal taxes, Miller (1977), and non-debt tax shields, DeAngelo and Masulis (1980). Another benefit of debt...