Trade-off model
Trade-off model is the model that features the addition of financial distress and agency costs to either the MM tax model or the Miller model. In this model, the optimal capital structure can be visualized as a trade-off between the benefit of debt (the interest tax shelter) and the costs of debt (financial distress and agency costs).
Definitions
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Trade-off model. The addition of financial distress and agency costs to either the MM tax model or the Miller model. In this model, the optimal capital structure can be visualized as a trade-off between the benefit of debt (the interest tax shelter) and the costs of debt (financial distress and agency costs).
Related concepts
- Financial management. A combination of enterprise efforts undertaken in order to procure and utilize monetary resources of the enterprise.
