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Sunday, 1 March 2015

If managements consistently optimize capital structure:-

http://en.wikipedia.org/wiki/Fed_model

If managements consistently optimize capital structure by substituting stocks (repurchasing shares) for bonds or vice versa, equilibrium is reached when:
\frac{E_{\text{x}}}{P_{\text{x}}}=R_{\text{x}}\ [1-T]
where E is the earnings-per-share of company xP is the share price, R is the nominal interest rate on corporate bonds and T is the corporate tax rate.

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