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An (S, s) Model of Capital Structure:

An (S, s) Model of Capital Structure: 2025

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The document presents a general (S, s) model of capital structure developed by Arthur Korteweg and Ilya A. Strebulaev, which examines the relationship between target leverage, refinancing thresholds, and firm characteristics in a dynamic context. It critiques traditional empirical methods for potentially misleading results due to firms' non-linear behavior in capital structure decisions. The findings indicate significant differences between traditional analyses and those based on the (S, s) model, particularly highlighting that target leverage is positively related to profitability contrary to conventional regression outcomes. The study emphasizes the importance of understanding refinancing thresholds and their implications for corporate finance research.

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What is the net income approach to capital structure?

Net Income Approach The Net Income Approach suggests that a company can enhance its value and lower its weighted average cost of capital (WACC) by increasing the proportion of debt in its capital structure. This approach is based on several assumptions: The cost of debt is lower than the cost of equity.

What are the 3 approaches in determining capital structure?

Answer: There are four important capital structure theories: net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.

What is the difference between NOI approach and NI approach?

The net income (NI) approach argues that greater debt use lowers WACC and increases firm value, while the net operating income (NOI) approach argues capital structure does not impact WACC or value.

What is the NOI approach to capital structure?

ing to Net Operating Income Approach, the market value of the firm is not affected by its capital structure. The value of the firm and its overall cost of capital remains same irrespective of the proportion of debt (or financial leverage) in capital structure.

What is the model of capital structure?

There are four capital structure theories. They include net income theory, net operating income theory, traditional theory, and Modigliani-Miller theory.

What are the four types of capital structure?

The three main parts of capital structure are debt, equity, and hybrid securities. Debt represents the borrowing obligation of the firm, equity entails shares issued in the company, and hybrid securities are a combination of debt and equity securities.

What is the NOI capitalization approach?

Income capitalization is a term that refers to the process of determining a propertys value by taking its net operating income (NOI) and dividing it by an appropriate capitalization rate. The most common way to find a propertys NOI is to subtract all expenses from its revenue, but this can be done in other ways.

An (S, s) Model of Capital Structure: 2025

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