Session 19: Enhanced Cost of Capital Approach and Determinants of Optimal

In this class, we started by tying up loose ends on the cost of capital approach, starting with why moving to the optimal changes the value of a business (hint: it is all in the tax code) and then looking at how sensitive the optimal debt ratio is to changes in operating income or rating constraints. We also looked at enhancements to the approach, where we incorporated indirect bankruptcy costs in the analysis. Finally, we examined the determinants of the optimal. In particular, it was differences in tax rates, cash flows (as a percent of value) and risk that determined why some companies have high optimal debt ratios and why some have low or no debt capacity.
Slides: http://www.stern.nyu.edu/~adamodar/po...
Post class test: http://www.stern.nyu.edu/~adamodar/pd...
Post class test solution: http://www.stern.nyu.edu/~adamodar/pd...

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