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Some Extensive Discussions of ZZ Leverage Model

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Fundamental Problems and Solutions in Finance

Part of the book series: Contributions to Finance and Accounting ((CFA))

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Abstract

This chapter conducts some extensive discussions based on the optimal capital structure model derived in previous chapter. The discussions mainly involve how to adjust the model to obtain the specific optimal leverage ratio of a company under a variety of circumstances. The specific circumstances considered include abnormal growth, bankruptcy expectancy, market value versus book value, guaranteed debt, transaction costs, personal income tax, inter-firm’s investments, etc. The relevant solutions are illustrated with a case study of Haier, a home appliance giant in China. This chapter also discusses an issue with top importance: what is the standard or hallmark of a problem is solved. This issue seems simple and clear but actually neither simple nor clear in finance. This issue belongs to the basic concept of finance and should have been discussed in Chapter “Finance and Its Fundamental Problems”. However, after all the discussions on various financial problems in previous chapters, here it is more convenient to illustrate the relevant opinions or ideas with examples.

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Notes

  1. 1.

    Growth rate is determined by the rate of return of the firm’s investment and its dividend policy. Given the dividend policy, the growth rate is positively related to the rate of return.

  2. 2.

    Such as Servaes and Tufano (2006).

  3. 3.

    For more detail, see their derivations in Chapter “Tax Shield, Bankruptcy Cost and Optimal Capital Structure”.

  4. 4.

    59.306927% more precisely.

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Authors and Affiliations

  1. Renmin Business School, Renmin University of China, Beijing, China

    Zhiqiang Zhang

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  1. Zhiqiang Zhang
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Correspondence to Zhiqiang Zhang .

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Zhang, Z. (2023). Some Extensive Discussions of ZZ Leverage Model. In: Fundamental Problems and Solutions in Finance. Contributions to Finance and Accounting. Springer, Singapore. https://doi.org/10.1007/978-981-19-8269-9_11

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