A Teaching Application: Assessing the Valuation Impact of Debt

Abstract

In this paper, we offer a teaching application of the capital structure decision-making process for a firm undergoing a change in its debt and equity mix. Our application uses a recent equation that contains the variables for which managers can reasonably estimate values. Suprisingly, the key variables found in this paper's equation are missing from the standard textbook equations and, until recently, even extant research. Given manager's estimates of the equation's variables, they can use the equation to choose an optimal debt level. Our application cannot only help business students understand the impact of the managerial debt choice on firm value, but can also provide them with a tool to use as future financial managers.