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Corporate Debt Value, Bond Covenants, and Optimal Capital Structure
Author(s) -
LELAND HAYNE E.
Publication year - 1994
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1994.tb02452.x
Subject(s) - capital structure , bond , debt , monetary economics , weighted average cost of capital , leverage (statistics) , economics , volatility (finance) , financial economics , debt ratio , business , finance , microeconomics , economic capital , mathematics , profit (economics) , statistics , individual capital
This article examines corporate debt values and capital structure in a unified analytical framework. It derives closed‐form results for the value of long‐term risky debt and yield spreads, and for optimal capital structure, when firm asset value follows a diffusion process with constant volatility. Debt values and optimal leverage are explicitly linked to firm risk, taxes, bankruptcy costs, risk‐free interest rates, payout rates, and bond covenants. The results elucidate the different behavior of junk bonds versus investment‐grade bonds, and aspects of asset substitution, debt repurchase, and debt renegotiation.