A Capital Structure Model with Growth

1. A Capital Structure Model with Growth Professor Robert M. Hull Clarence W. King Endowed Chair in Finance School of Business Washburn University 1700 SW College Avenue Topeka, Kansas 66621 (Phone: 7853935630) Email: rob.hull@washburn.edu

2. Overview of Paper Broadens perpetuity gain to leverage (GL) research by incorporating and analyzing growth within the capital structure model (CSM) formalized by Hull (2007). Argues that, contrary to pecking order theory (POT), internal equity is more expensive than external equity. Discusses how the plowback ratio decides the minimum unleveraged growth rate (gU) and how leads to choosing a target leverage. Develops a break-through concept: the leveraged growth rate for equity (gL). Establishes that gL depends on both the plowback-payout decision and the target leverage decision, thus showing how these decisions are intertwined. Derives a growth-adjusted CSM equation and analyzes the role of the growth-adjusted discount rate within this equation. Examines the growth-adjusted CSM equation to show how a change in the debt-to-equity mix influences firm value through its impact on gL. Illustrates why firms with growth often have lower optimal debt-equity (ODE) ratios. Suggests why paying a high coupon rate diminishes a positive agency shield effect. Yields a stunning (yet simple) finding: the starting point for an ODE is the cost of leveraged equity adjusted for growth (rLg) divided the cost of debt (rD). Brings us closer to developing a full CSM model by setting the stage for further enhancements within the CSM framework.

3. Definitions • Gain to Leverage (GL) formulations are formulations that measure the change in value caused by changing the amount of debt. • Equity discount rateis the firm’s cost of borrowing for equityor the return required by investors in equity (for most firms equity is just common equity). The rate can be for an unleveraged firm (rU) or a leveraged firm (rL). • Debt discount rate is the firm’s cost of borrowing for debt or the return required by investors in debt (rD). For most firms debt is long-term debt such as bonds or short-term debt that is renewed indefinitely. • Plowback-payout choice determines the unleveraged growth rate (gU). This choice along with the leverage choice decides the leveraged growth rate (gL). • Target debt-equity choice(Target DE) is the amount of debt relative to the amount equity at which the firm and its manager strive to obtain (the target can be viewed as involving the amount of debt that maximizes firm value). Optimal debt-equity ratio referred to as ODE. • Perpetuity with growth involves a perpetual cash, a discount rate, and a growth rate. Any series of uneven cash flows can be approximated by a perpetuity with growth. We refer to the growth rate for an unleveraged firm as gU and for a leveraged firm as gL. • Growth-adjusted discount rate refers to the discount rate minus the growth rate. For an unleveraged firm the equity growth-adjusted rate is rUg = rUgU. For a leveraged firm it is rLg = rLgL.

4. There are thousands of firms per year that on average report no long-term debt (including capitalized lease obligations). The starting point of this paper is an unleveraged firm seeking to increase its value by issuing debt. Capital structure perpetuity research begins with Modigliani and Miller, MM, (1963) who derive a gain to leverage (GL) formulation in the context of an unleveraged firm issuing risk-free debt to replace risky equity. For MM, GLis the corporate tax rate multiplied by debt value. The applicability of MM’s GLformulation is limited. Miller (1977) and Warner (1977) are among those who argue that debt-related effects are weak and have no real impact on firm value. Altman (1984), Cutler and Summers (1988), Fischer, Heinkel and Zechner (1989), and Kayhan and Titman (2006) provide contrary evidence. Graham (2000) estimates that the corporate and personal tax benefit of debt is as low as 4.3% of firm value. Korteweg (2009) finds that the net benefit of leverage is typically 5.5% of firm value. Given the presence of debt in the capital structure of most firms as well as the evidence concerning leverage-related wealth effects, there is a need to offer usable equations that can quantify these effects. This paper aims to fill this void by offering GLformulations quantifying these effects. This paper extends the Capital Structure Model (CSM) of Hull (2007) by incorporating growth and in the process shows the interrelationship of the plowback-payout and leverage decisions within a perpetuity GL equation with growth. Introduction and Background

5. Prior GL Formulations • MM (1958): Gain to Leverage (GL) = 0. Value determined solely by operating assets. • MM (1963): GL= TCD where TCis the applicable corporate tax rate and D = I/rDwhere I is the perpetual interest payment and rDis the cost of debt. • Miller (1977): GL= (1α)D where α= (1TE)(1TC) / (1TD) with TEand TDthe personal tax rates applicable to income from equity and debt, Dnow equals (1TD)I/rD, and (1α) < TC is expected to hold. • Hull (2007): GL = [1(αrD/rL)]D[1(rU/rL)]EU. Hull’s CSM equation is the only equation with equity discount rates (e.g., the unleveraged equity rate of rU and the leveraged equity rate of rL).

6. I. Why Internal Equity Is More Costly than External Equity:The Pecking Order Theory Debunked Double Taxation: Because corporate taxes are paid before internal equity or retained earnings (RE) can be used for growth purposes, a firm actually has (1TC)REavailable to reinvest for these purposes. This gives a double taxation situation because the cash flow generated from retained earnings is taxed again at the corporate level before being paid out to owners. How does this double taxation affect the plowback ratio (PBR)? In terms of cash earnings available before taxes for distribution or plowback, we have: (1) cash that is retained (RE) and (2) cash that is paid out (C). We have (1TC)RE useable for reinvestment after we adjust for double taxation. This means that the real PBR is below what is conventionally stated and believed to be the PBR. We call this real PBR by the name of the adjusted PBR. Let us illustrate the adjusted PBR. Suppose the following: (i) cash earnings available before taxes for distribution or plowback (C+RE) is $1B (B = billions); (ii) retained earnings before double taxation consideration (RE) is $0.3B; and, (iii) the effective corporate tax rate (TC) is 0.2. What are the PBR and the adjusted PBR? We have: PBR = RE/(C+RE) = $0.3B/$1.0B= 0.30. Adjusting for double taxation, we have: (1TC)RE= (1–0.2)$0.3B = $0.24B. Thus, the adjusted PBR= $0.24B/$1.0B = 0.24 or simply (1–TC)PBR = (1–0.2)3 = 0.8(3) = 0.24. (We could further adjust the denominator and get an adjusted PBR of 0.256.)

7. II. Why Internal Equity Is More Costly than External Equity:The Pecking Order Theory Debunked Considering taxes, flotation fees, and momentarily ignoring asymmetric information effects associated with external equity, the cost to equity owners to raise funds for growth can be represented as a negative cash outflow in one of two ways: • cost from using internal equity (e.g., retained earnings) = (–TC )(Gross Funds Raised) • cost from using external equity = (–F)(Gross Funds Raised) where Fis the flotation fees as a portion of Gross Funds Raisedwith the latter referring to funds raised before taxes and flotation fees are considered. The expression representing the cost from using internal equity would be much more expensive than the cost from using external equity because TC>F should hold since TC should be close to five times greater than F. This is based on reported estimates of 5.5% for F and 26% for TC . In light of double taxation for internal equity, POT’s prediction that internal equity is cheaper does not hold. NOTE. For seasoned offerings, Hull and Kerchner (1996) reported average cash costs of about 5.5%with smaller firms having greater costs (near the 7.0% average cash costs commonly found for IPOs). The effective corporate tax rate was given as 25% for 2002-2006 according to Tax Notes, January 22, 2007. It is given as 27% by the Treasury Department, July 23, 2007. The average corporate tax rate of 26% suggested by these two sources is less than the 39% combined statutory federal tax rate and average state tax rate. Reasons as to why the effective rate is below the statutory rate include accelerated depreciation, tax deduction from employee stock option profits, tax credits, and offshore tax sheltering.

8. Minimum Unleveraged Growth Rate What is the minimum unleveraged growth rate (gU) that an unleveraged firm must attain so that unleveraged equity value (EU) will not fall when the firm chooses to reinvest its retained earnings? • This can be shown to depend on the plowback ratio (PBR). For example, consider the value of an unleveraged firm with no growth (EU): EU(no growth) = (1TE)(1TC)C / rU where TE is the effective personal tax rate paid by equity owners, TC is effective corporate tax rate, and C the before-tax cash flow paid out to equity owners. • One minus the plowback ratio, (1–PBR), which is the payout ratio (POR), determines the after-tax cash paid out over time with growth such that the numerator of (1–TE)(1–TC)Cis replaced by (1–TE)(1–TC)C(1–PBR). This means that the discount rate of rU must be lowered by at least (1–PBR) if EU is not to decrease when it chooses growth. For this lowered discount rate, we have: (1–PBR)(rU) = rU–(PBR)rU where the minimum unleveraged growth rate (gU) must equal (PBR)rUmaking the making the growth-adjusted denominator equal to rU–gU .With gU = (PBR)rU, the two EU values are equal: EU(growth) = EU(no growth) or (1–TE)(1–TC)C(1–PBR) / rU–gU=(1–TE)(1–TC)C/rU.

9. Unleveraged Growth Rate • We can express unleveraged growth rate (gU) as: gU=RU/C where RUis the change in C (or ΔC) with RU=rU(1TC)RE. Inserting this value for RU into the above gU equation, we get: gU=rU(1TC)RE/C where RE is the retained earnings determined by the plowback ratio (PBR). • Recalling thatthe minimum unleveraged growth rate (gU) must equal (PBR)rU and rearranging gU=RU/C so that RU = gU(C), we can insert gU = (PBR)rU into RU = gU(C) to get RU = rU(PBR)Cand use this equation along with RU = rU(1TC)REto show that TC = PBR. (Proof in paper.) • Thus, if RU = rU(PBR)Cand RU = rU(1TC)RE gives the same value for RU, then TC equals PBR. Interpretation:TC determines the ideal starting point for setting PBR to achieve minimum gU. [NOTE: We have found that GL is maximized at some threshold point where PBR > TC holds; beyond this threshold GL can start falling dramatically. Even if the firm can not achieve a PBR as high as TC or higher, it can still achieve a higher GL to the extent that it can increase its PBR. If TC is low, then PBR must be greater than TC for firm maximization.] • Unlike the equilibrating gL described next, the value for the gUusing gU = rU(1TC)RE/Cis the same as that using gU= RU/C. Both gU values also change but remain equal when we change a value for either TC or PBR.

10. I. Leveraged Growth Rate • An equilibrating leveraged growth rate (gL) is derived based on two definitions for RL where RL refers to the change in cash flow paid to leveraged equity owners (C). • The two definitions are: RL = gL[C+GI/(1TC) ] and RL = rL(1TC)RE. • From these two definitions, we get: equilibrating gL=rL(1TC)RE/[C+GI/(1TC)]. • In comparing to the equilibrating gL to gU from the equation of gU=rU(1TC)RE/C, we can see that equilibrating gL > gU should hold. • This because the equilibrating gL equation has a larger numerator (e.g., rL > rU) and also has a smaller denominator for most situations (e.g., I/(1TC) > G should hold).

11. II. Leveraged Growth Rate • The equilibrating gL equation of rL(1TC)RE/[C+GI/(1TC)]shows the role of the plowback choice (RE) and the leverage choice (I). Thus, the concept of the leveraged growth rate ties in these two choices. • G represents the perpetual cash flow from the gain to leverage. (See next overhead for more information on G.) • We divide I by (1TC) because, unlike C or G, I is not subject to corporate taxes. • The amount of debt issued must be reasonable such that the interest of I would not set the equilibrating leveraged growth rate of gLat a large and unsustainable rate for a long-term horizon (and possibly make the denominator negative). • We would expect that gL will become negative if I dominates (C+G) for more extreme higher levels of debt. At some point, a negative gL will cause a large positive rLg (even though in practice that point would never be desired). • If GL becomes negative then G also becomes negative making gL increase rapidly as I increases before things totally break down and gL becomes negative.

12. The Perpetual Cash Flow Resulting from GL: “G” • Assume GL > 0 and that it can be represented as a positive perpetual cash flow of G discounted by the same rate as EL = (1TE)(1TC)(C+I) / rLg. If so, we have: GL = (1TE)(1TC)G/rLg. • Rearranging to solve for G, we have: G= rLg(GL)/(1TE)(1TC). • As found in the paper, we have two definitions for leveraged equity (EL) that are equal but which have different cash flows and discount rates. We have: (1) EL = (1TE)(1TC)(C+I) / rLg, and (2) EL = (1TE)(1TC)(C+I+G) / rLg’. • By adding the perpetual cash flow of G in the leveraged equity’s cash flows in (2), the discount rate of rLg must increase to rLg’ for EL to remain unchanged. From this we can generate a G value equal to G but with a definition that includes some different variables: G= [rLg’(EL)/(1TE)(1TC)]  C + I where G = G and rLg’ > rLg. • When breaking down GL so that G = G, we find two rLg values (rLg and rLg’) result to give the same GL value; thus, an rLg value depends on how we define EL. The understanding of G is crucial because to compute gL we must first compute G. When working in Excel, one must use the iterative command to achieve equality for Gand G.

13. I. Interdependence of Plowback-Payout Decision and Target Leverage Decision • For an unleveraged firm financing strictly with internal funds to achieve a specified level of expansion, the plowback-payout decision is inseparable from determining the amounts of RE and C where these two amounts in turn establish RU and gU. • Thus, C, RE, RU and gU are determined endogenously (subject to finite operating cash flows) when an unleveraged firm chooses its plowback-payout ratios. • The plowback decision or payout decision (or both because one implies the other) can drive gU. But this was for an unleveraged situation. What if managers of an unleveraged firm decide it can maximize its value by becoming leveraged because GL > 0 holds for at least one debt level choice? • The answer is that we must now consider how the change from gU to gLintrinsically leads to maximizing firm value in such a way that the plowback-payout decision would be determined based on consideration of leverage choices.

14. II. Interdependence of Plowback-Payout Decision and Target Leverage Decision • A firm’s plowback-payout and leverage decisions are both intertwined, and even inseparable, and any GL model dependent on the usage of a target leveraged growth rate reveals that firm maximization depends on recognizing both decisions in tandem. • When undergoing a debt-for-equity exchange, how would a manager of an unleveraged firm go about determining an optimal firm value if the plowback payout choice is indeed inseparable from on optimal leverage choice? • A manager would begin by considering a spectrum of possible sets of choices for C and RE. Each C and RE set would then be combined with a range of feasible interest payment (I) choices to compute firm values. • Suppose a manager finds there is one set of C and RE values that combines with one I value that renders a maximum firm value. If this be case, we can say that C, RE, and I all simultaneously determine the maximum firm value and the plowback-payout and leverage decisions are inseparable in this maximization process. • If a firm has ten debt choices and ten plowback-payout choices, then 100 different combinations would have to be analyzed. With an Excel spreadsheet this task is not hard once the proper variables are inputted. Furthermore, through the analysis of the 100 different combinations, one could see which combinations give the greatest firm value. One could then further refine the choices so that the correct leverage and plowback-payout choices are made to achieve any desired precision. Given TC, the process could be considerably reduced because (as suggested previously) TC gives the starting point for the plowback-payout choice.

15. GL Formulation with Growth • Starting Point: GL = VLVUwhere VL is leveraged firm value and VU is unleveraged firm value. • VU= (1TE)(1TC)C/rUgwhere C is the unleveraged equity before-tax cash flow with rUg>rD and rUg = rUgU. • VL = EL+Dwhere EL= (1TE)(1TC)(CI)/rLgwith rLg = rLgLand D=I/rD. • VL’= EL’ + Dwhere EL’= (1TE)(1TC)(CI+G)/rLg’ with rLg’ > rLg.

16. Appendix 1: GL for a Debt-for-Equity Transaction • In Appendix 1 we show that: GL = [1(arD/rLg)]D +[1(rUg/rLg)]EU. (13) • Equation (13) is a more general equation reducing to: (i) Hull’s non-growth GL equation when growth is zero; (ii) Miller’s GL equation when growth is zero and discount rates are equal; (iii) MM’s GL equation when growth is zero, discount rates are equal, personal taxes are zero, and debt is risk-free. • Note that the 1st component of (13) typically remains positive and the 2nd component typically remains negative until things break down with large positive (and unsustainable) leveraged growth rates (gL) that then becomes negative due to a large I values. For example, a negative GL causes G to become negative, which in turn causes gL to become negative. The latter can be seen from the equation of equilibrating gL=rL(1TC)RE/[C+GI/(1TC)].

17. An Illustration on Why Young Firms with Growth Avoid Debt • Assume two unleveraged firms, A and B, where B is younger but more risky with greater growth opportunities. A and B have respective rU values of 0.08 and 0.10, and gU values of 0.01 and 0.05. Thus, the growth-adjusted unleveraged costs of equity for A is rUg = rUgU= 0.080.01 = 0.07and for Bis rUg = rUgU= 0.100.05 = 0.05. • Now assume both achieve identical debt-for-equity exchanges retiring 30% of their outstanding equity shares. Suppose Aand B estimate their respective leveraged equity discount rates to be 0.10 and 0.13 and their leveraged growth rates to be 0.03 and 0.08 after their debt-for-equity exchanges. Thus, the growth-adjusted discount rate on leveraged equity for Ais rLg = rLgL= 0.10 – 0.03 = 0.07 and for Bis rLg = rLgL= 0.13 – 0.08 = 0.05. • Suppose that Aand B have respective costs of debt (rD) to be 0.05and 0.07when issuing enough debt to retire 30% of their equity shares and a is 0.8 for both. Thus, for A, we have arD= 0.8(0.05) = 0.04 and, for B, we have: arD = 0.8(0.07) = 0.056. • We see that the 2nd component of (13), GL = [1(arD/rLg)]D +[1(rUg/rLg)]EU, will be zero since rUg = rLg for both A and B, while the 1stcomponent will be positive for A: [1(arD/rLg)]D = [1(0.04 /0.056)]D = [1 – 0.571429]D = +0.428571D; but, it will negative for B: [1(arD/rLg)]D= [1(0.056 /0.500)]D= [1 – 1.12000]D = –0.120000D. • Thus, the 1stcomponent gives a 0.428571D– (–0.120000D) = 0.548571Dadvantage to Aif 30% of equity is retired. • Using the equation (13) the above numbers indicate that Acould increase its value by exchanging 30% debt for equity, while Bwould lower its value if it did the same.

18. CSM’s Consistency with an Optimal Debt-to-Equity Ratio • Consider GL= n1D + n2EUwhere n1 = [1(arD/rLg)] and n2 = [1(rUg/rLg)]. • Together, n1and n2emphasize that GLis a function of tax rates, growth rates, and discount rates for debt and equity. • Such factors might include investor clientele tax rates, current tax legislation, nondebt tax shields, employee stock options, alternative minimum tax, tax credits, industrial factors, expected growth in GNP, riskless rate, betas, expected market return, outstanding debt, need for financial slack, financial risk, business risk, free cash flows, managerial autonomy and inside ownership level. • The dollar sizes of the values for equity and debt are more a function of a firm’s age and industry. We can describe two divergent scenarios for these security size factors. • For a younger and growing firm (say in the computer software industry), we expect equity value to be greater than debt value, while for an older and mature firm (say in the electric utility industry), we expect debt and equity values to be more similar. • For an unleveraged firm issuing debt that is small relative to EU, the equation of GL = n1D + n2EU suggests that│n1│must be sizeable compared to│n2│; otherwise, GLmay have little chance of being positive unless it increases its amount of debt issued.

19. Qualitative Argument for an Interior Optimal Debt Level to Exist • The paper offers a qualitative argument that the gain to leverage (GL) is not a minimum and the chosen debt level is not an endpoint. The argument is based on (i) Rolle's Theorem where we have two endpoints where GL = 0 holds and (ii) the consideration that firms that issue more debt would not do so unless there is an expected gain. For a leveraged firm that chooses not to issue more debt, one might assume the firm already believes that its attained debt level is its optimal debt-equity level (ODE). • The paper offers a test for downward concavity and the existence of a maximum ODEfor its CSM GL equation. We show that ODE = rUg/arD. • When using ODE= rUg/arDas an estimate of a firm’s optimal leverage ratio, one should note that this equation may not properly allow for (i) the impact of an increasing rD that could reverse the positive agency effect in the 1st component or (ii) a wealth transfer effect among security holders. Both of these agency effects could severely limit the ODE from achieving a value as great as rUg/arD. • The paper offers an illustration of ODE = rUg/arD using a practical example. The expression for ODE works well for this example using real world data but it is only a sample of one.

20. Appendix 2: GL for an Equity-for-Debt Transaction • In Appendix 2, we derive GLfor a leveraged firm undergoing an equity-for-debt transaction with personal taxes and constant growth and show that GLcan still be expressed as two components with components reversed from debt-for-equity transaction. • For the first component we now have: [1(rUg/rLg)]EU. • For the second component we now have: [1(arD/rLg)]D. • Putting these together, we have: GL = [1(rUg/rLg)]EU[1(arD/rLg)]D.

21. Relation between Optimal Payback and Leverage Choices: Fix TC = 0.10; gU = 4.45%; gL = 7.54%

23. Relation between Optimal Payback and Leverage Choices: Fix TC = 0.30; gU= 4.92%; gL= 8.35

25. Results for All Nine Debt Level Choices for the Application

26. Table 1Application of Gain to Leverage Formulation for a Real World Firm Assuming Risky Debt, Personal Taxes, and Constant Growth Rate

27. Table 1.Application of Gain to Leverage Formulation for a Real World Firm Assuming Risky Debt, Personal Taxes, and Constant Dollar Grow

28. Each panel has two bold-faced rows. The 1st bold-faced row is for the current situation where book D/V = 0.5, while the 2nd bold-faced row is for book D/V = 0.7, which is where GL is maximized for both panels. As seen in the last column of Panel B, it is also the row which is nearest the market target D/E of 1.5. For this row, we get GL = $1.4537 billion on a before personal tax basis (which is what the market sees). For this row, dividing EL by the number of outstanding shares (NL), we get a share price ≈ $14.42. For example, with D/V = 0.7 (or E/V = 0.3), we have NL = (E/V)(NU) = 0.3(912,000,000) = 273,600,000 shares giving the share price as: PBefore Personal Tax = EL / NL = $3,944,340,023 / 273,600,000 shares = $14.4164 per share ≈ $14.42. This is less than the average market price at the time of this writing, which has averaged $13.83 for January 2005. Thus, $14.42 can be considered a prediction of the future price (absent effects beyond those stemming from the increased debt) if the market target is achieved. The prediction for the stock price at the time we begin estimating values for our variables (February 2004) can be computed for the 1st bold-faced row where NL = 456,000,000 shares. We have: PBefore Personal Tax = EL / NL = $5,075,687,792 / 456,000,000 shares = $11.1309 per share ≈ $11.13. This price is consistent with both the average price of $11.06 for AGL Co. for February 2004 and also for the average price of $11.29 for the year of the 2003 annual report (7/1/03 to 6/30/04).

29. Shortcomings of Application We can point out four shortcomings of our application, which in general are found in all models that rely on accurate estimates of values for given variables. First, personal tax rates were not directly known. This problem was ameliorated through use of an effective tax rate and analysis of before personal tax values. Second, we had to unleverage our firm in an attempt to estimate the number of shares outstanding if it had no debt. The estimate appears to be workablegiven that our share estimates gave predictions for stock prices that were quite consistent with given market prices. Third, we encountered problems when approximating betas. For example, we had to interpolatefrom endpoints and a midpoint to get reasonable βD’s for each debt level choice. From there we could proceed to get βU and then obtain βL’s for the nine debt level choices by using a standard formula. However, unless adjusted upward, those βL computations for higher debt levels would suggest that firms aim for extremely high leverage targets that we do not find in the real world. This caused us to make intuitive assignments for several leveraged equity betas. Future research needs to explore other ways of estimating betas and costs of capital such as suggested by Fama and French (1997) and Lally (2004). Fourth, the application had to estimate a constant dollar level of growth (RL) based upon a chosen growth rate at the target debt-equity choice (which was gL= 5.4%). Using the iterative command in Excel, we were able to solve for RLby first computing the interest paid.

30. Summary & Conclusion • This research derives GL formulations based on definitions for unleveraged and leveraged firm values. Such formulations include discount rates for unleveraged equity, leveraged equity, and debt. The inclusion of these rates makes it possible for GL values to eventually decrease with increasing debt levels. Three GL formulations for an unleveraged situation are offered to aid managers (when making the debt-equity choice) and educators (when explaining the ramifications of this choice). • The application using analysts’ data for AGL Co. showed how managers can use the GL formulation with growth to estimate how issuing debt changes firm value. While this paper’s model (like any model) relies on accurate estimates of values for variables, its optimal GL did conform to the suggested market target D/E of 1.5. • Prior research offers GL formulations difficult for practitioners. They tend to include variables virtually immeasurable in themselves (e.g., bankruptcy and agency costs). As such, financial managers are hard pressed to find utility in their application. To the extent changes in discount rates are easier to estimate, this paper's GL formulations offer more practical potential. • This paper’s practical application suggests a wealth maximizing D/E choice. The choice depends not only on changes in discount rates but also tax and growth rates. The application’s results are consistent with prior empirical and theoretical research in regard to the belief that taxes, bankruptcy costs, and agency effects can determine a firm’s optimal debt-equity choice. • The GL formulations found in this paper reaffirm, synthesize, and extend prior GL formulations, while opening up a fresh vista from which to view the D/E choice faced by managers. This vista offers a practical vantage point in that capital structure decision-making can be based on variables heretofore not fully utilized.

31. Celebrate Relax It’s Over!