13 F. Modigliani and M. Miller, “The Cost of Capital,
Corporation Finance and the Theory of Investment,”
American Economic Review48 (1958): 261–297.
14 In other words, the value of the firm might not be
maximizedatthepointthatcostofcapitalisminimized,if
firm cash flows are much lower at that level.
15 Iftheydonothaveprotectiveputs,itisinthebestinterests
of the stockholders not to refinance the debt (as in the
leveraged buyout of RJR Nabisco) if debt ratios are increased.
16 Thiswillhavetheeffectofreducinginterestcost, when
debtisincreased,andthusincreaseinterestcoverageratios.
Thiswillleadtohigherratings,atleastintheshortterm,and
a higher optimal debt ratio.
17 This estimate is based on the Warner study, which
estimates bankruptcy costs for large companies to be 10
percentofthevalue,andonthequalitativeanalysisofindirect
bankruptcycostsinShapiroandTitman.(Seefootnotes 7 and
8 for full citations.)