The Impact of Credit Rating and Frequent Refinancing on Firm Value
Posted: 27 Sep 2012 Last revised: 5 May 2015
Date Written: December 5, 2012
Abstract
Rating affects corporate credit costs and leverage choices. Therefore, we develop a corporate valuation model where the choice of leverage is consistent with the implied cost of debt of the rating class. We explicitly model the trigger, the consequences, and the analytical probability of bankruptcy. Further, we develop a financing policy where the firm refinances with a predefined frequency. To conclude, we develop value implications of rating and financing policy which are in line with the trade-off theory in capital structure theory.
Keywords: Capital Structure, Financing Policy, Credit Rating, Bankruptcy, Tax Shield, Corporate Valuation, APV, WACC
JEL Classification: G13, G31, G32, G33
Suggested Citation: Suggested Citation