S L is the market value of equity in a levered firm. They will not be proved, only presented. Essentially, what Hsia does, is extending the Rubinstein framework by the Black-Scholes OPM formula. Then, he uses the fact that the value of equity in a levered firm is identical to the value of a call option written on the firm, and that the value of risky debt in a levered firm is the same as the value of risk-free debt plus a short put option on the value of the firm. V is the return on the firm s asset.
T is the maturity time of the firm s bonds.
D is the future value of the zero coupon bond, or face value. The WACC formula may be generalized to include any number of financial instruments and different tax assumptions. The generalized Modigliani and Miller theorems may seem complicated when looking at the mathematics. But fortunately, the propositions are very simple to illustrate in a figure. This is done in figure I below.