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We introduce a model in which risk-free interest rate, firm risk, bankruptcy costs, issuance
costs, tax benefits on debt, and earnings ratio, determine the optimal choice of leverage and
maturity. The model assumes that debt pays a regular flow of interest, allows the firm to rebalance
its optimal capital structure at maturity issuing new debt at par, links tax deductions to the presence
of taxable income, and considers default to be an endogenous and time-dependent decision.
Simulation results are also provided, with standard leverage ratios, debt maturities, and credit
spreads being replicated for reasonable parameter values.
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