Journal of Financial Economics Vol. 4 No. 2 1977
Leverage, output effects, and the M-M theorems
Abstract
This paper uses the Capital Asset Pricing Model to link the financial policy of the firm with the firm's real decisions including output, input mix, and investment. Whereas the M-M leverage theorems were derived for a given set of real decisions, this paper considers the impact of leverage on firm optimization when interest is tax-deductible. In general, leverage impacts upon factor proportions, capital stock, and output decisions. In the final proposition, the author demonstrates that the ‘cost of capital’ need not decline with leverage even in perfect capital markets and with default-free debt.
- DOI
- 10.1016/0304-405x(77)90010-1
- Volume
- 4
- Issue
- 2
- Pages
- 177-202
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref