Definition for : Extended trade-off model

The extended Trade-off model is a Trade-off model that takes into account Financial distress costs, Agency costs, costs associated with the loss of the financial flexibility as a result of exhausted borrowing capacity and the Tax shield generated by Debt. According to the extended Trade-off model, optimal Leverage is obtained where the Weighted average cost of capital reaches the minimum point, reflecting the balance between the Tax shield and all the above mentioned costs.

(See Chapters Chapter 34 Debt, equity and options theory and Chapter 36 Returning cash to shareholders of the Vernimmen)

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