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.
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