Authors: Tian-Shyr Dai; Chuan-Ju Wang
Addresses: Department of Information and Finance Management, Institute of Information Management and Institute of Finance, National Chiao-Tung University, 1001 Ta Hsueh Road, Hsinchu 300, Taiwan ' Department of Computer Science, University of Taipei, No. 1, Aiguo W. Rd., Taipei 10048, Taiwan
Abstract: We examine the change of levered firm's capital structures due to different investment decisions of realised tax benefits and various sources of fund to finance coupon and dividend payouts. The complexity is analytically intractable but numerical approaches provide insights. Retaining realised tax benefits and investing them in risk-free assets instead of risky ones result in higher debt capacity and optimal firm value. The impact of positive-net-worth bond covenants on shareholders' investment decisions of realised tax benefits and the related agency problem are analysed. The impact of selling firm's asset (to finance payout) on optimal levered firm value is also analysed.
Keywords: credit risk; option pricing; realised tax benefits; capital structures; investment decisions; coupon payouts; dividend payouts; debt capacity; firm value; risk-free assets; positive-net-worth bond covenants; agency problem.
International Journal of Bonds and Derivatives, 2013 Vol.1 No.1, pp.88 - 109
Received: 24 Apr 2013
Accepted: 10 Jul 2013
Published online: 25 Sep 2013 *