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Equilibrium in the Pricing of Capital Assets, Risk-Bearing Debt Instruments, and the Question of Optimal Capital structure: A Comment

Published online by Cambridge University Press:  19 October 2009

Yutaka Imai  and
Mark Rubinstein
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Extract

In a recent article in this Journal, Haugen and Pappas (H-P, hereafter) [1] attempted to prove, within the framework of the capital asset pricing model, the already proven proposition that the cost of capital is invariant with respect to leverage even with risky debt. The H-P proof contains a serious error which we would like to point out in this note.

Type
Communications
Information
Journal of Financial and Quantitative Analysis , Volume 7 , Issue 4 , September 1972 , pp. 2001 - 2003
Copyright
Copyright © School of Business Administration, University of Washington 1972

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References

[1]Haugen, R.A., and Pappas, J.L.. “Equilibrium in the Pricing of Capital Assets, Risk-Bearing Debt Instruments, and the Question of Optimal Capital Structure.” Journal of Financial and Quantitative Analysis, VI, June 1971, pp. 943–953.CrossRefGoogle Scholar
[2]Stiglitz, J.E. “A Re-Examination of the Modigliani-Miller Theorem.” American Economic Review, LIX, December 1969, pp. 784–793.Google Scholar