Much of the literature on optimal capital structure has taken the unlevered firm value to be the underlying state variable, even though the unlevered firm ceases to exist after a capital structure change occurs. This approach has been a source of confusion, leading to conflicting views on the...

An acceptable model of capital structure theory must be able to explain both the wide range of debt ratios observed, and the apparently large tax advantage to debt, as evidenced by the large premiums paid during leveraged buyouts. Generalizing the framework of Leland (1994b), this paper...

A model of dynamic capital structure is proposed. Even though the optimal strategy is implemented over an arbitrarily large number of restructuring periods, a scaling feature inherent in the framework permits simple closed-form expressions to be obtained for equity and debt prices. When a firm...