This paper develops and analyzes a dynamic model of leverage, taking account of tax deductibility of interest payments and the endogenous expected cost of default. The interest rate on debt includes a premium to compensate lenders for expected losses in default. Lenders are unwilling to lend an amount that would trigger immediate default, which places a borrowing constraint on the firm. When th...

A simple counterexample shows that the widely used WACC approach to value leverage firms developed by Miles and Ezzell can create an arbitrage opportunity. The only consequence to be drawn is that their WACC approach cannot be applied under the circumstances assumed by Miles and Ezzell. We show how the WACC has to be modified in order to obtain proper results. We develop a theory in continuous ...

The objective of this paper is to identify the bank organizational structures that generate substantial systemic risk and to explain why banks have incentives for creating them. We seek the explanation in a bank’s incentive to exploit financial synergies by choosing an organizational structure that maximizes the benefits the bank can derive from an interest tax shield, reduced default cost and ...

This study investigates the cross-industry determinants of capital structure. Sample consists of firms from three main industries (textile, cement and power industry) of Pakistan. Five year data from 2005 to 2009 is collected for 199 firms out of which 149 firms from textile industry, 23 from cement industry and 27 from power industry. Leverage is taken as a dependent variable and Profitability...

underground economy affects important indexes such as formal gdp, unemployment, consumption, production and etc. therefore it is necessary to identify elements and factors which affect underground economy to restrict it. surveys and studies indicate the size of iran’s underground economy is high and taxes, quantity and quality of regulations and performance of formal economy are the important f...

This paper examines the optimal mix and priority structure of bank and market debt using a tax shield-bankruptcy cost tradeoff model where the only unique feature of banks is their ability to renegotiate. Closed-form expressions are derived for the values of renegotiable bank debt, non-renegotiable market debt, equity, and levered firm values. Optimal debt structure hinges upon ex post bargaini...

If debt markets can price the risk of projects accurately, then the interests of shareholders and the regulator diverge. Shareholders see their value maximised by an equity-rewarded executive. However we demonstrate that such executives destroy welfare by selecting excessively risky projects due to two types of government-induced distortions: the debt tax shield and the implicit too-big-to-fail...

the corporate income tax rate plays a worthwhile role in developing fiscal and tax policies for companies, lawmakers and analysts. so, one of the most important issues in tax field, is to determine effective tax rates. the study and scientific calculations of the effective tax rates provide an enhanced tax justice and a careful study of tax pressure on taxpayers would be possible. the objective...

Wisconsin Blue Cross was chartered in 1939 as a "charitable and benevolent corporation" to cover hospitalization costs at a time when most Americans did not have health insurance. In order to promote the protection that insurance afforded, the Wisconsin legislature exempted the company from most state and local taxes. During World War II, the federal government created tax deductions for both e...