Some Extensive Discussions of ZZ Leverage Model

This chapter conducts some extensive discussions based on the optimal capital structure model derived in previous chapter. The discussions mainly involve how to adjust the model to obtain the specific optimal leverage ratio of a company under a variety of circumstances. The specific circumstances considered include abnormal growth, bankruptcy expectancy, market value versus book value, guaranteed debt, transaction costs, personal income tax, inter-firm’s investments, etc. The relevant solutions are illustrated with a case study of Haier, a home appliance giant in China. This chapter also discusses an issue with top importance: what is the standard or hallmark of a problem is solved. This issue seems simple and clear but actually neither simple nor clear in finance. This issue belongs to the basic concept of finance and should have been discussed in Chapter “Finance and Its Fundamental Problems”. However, after all the discussions on various financial problems in previous chapters, here it is more convenient to illustrate the relevant opinions or ideas with examples.