American Institute of Mathematical Sciences

Advanced
  • Previous Article
    Joint pricing and ordering policies for deteriorating item with retail price-dependent demand in response to announced supply price increase
  • JIMO Home
  • This Issue
  • Next Article
    Risk-minimizing portfolio selection for insurance payment processes under a Markov-modulated model
April  2013, 9(2): 431-436. doi: 10.3934/jimo.2013.9.431

An optimal financing model: Implications for existence of optimal capital structure

B. D. Craven 1, and  Sardar M. N. Islam 2,

1. 

Mathematics Department, University of Melbourne, Melbourne, Australia
2. 

CSES, Victoria University, Melbourne, Australia

Received  May 2011 Revised  January 2013 Published  February 2013

Modigliani and Miller's argument of the irrelevance of the debt-equity ratio to the value of the firm implies that capital structure has no impact on the value of the firm (irrelevance result). In the existing work, the proof or disproof of the Modigliani and Miller theorem is based critically on some specific assumptions, not general enough to be always valid in practical finance, and including especially a constant interest rate for borrowing. This paper develops another optimal financing model, whose assumptions differ from those in previous models for the Modigliani and Miller theorem. If the borrowing rate increases with the amount borrowed, there is a unique optimal ratio of debt to equity, determining the optimal capital structure. Therefore the debt-equity ratio does affect the value of the firm, and hence the need for good corporate financial management to maximize the value of the firm, by choosing the optimal debt. Some important issues of sensitivity are also analysed. The proposed model should apply to more real situations, and therefore makes an original contribution to finance.
Keywords: irrelevance theorem, value of a firm, Capital structure, debt-equity ratio..
Mathematics Subject Classification: 91G5.
Citation: B. D. Craven, Sardar M. N. Islam. An optimal financing model: Implications for existence of optimal capital structure. Journal of Industrial & Management Optimization, 2013, 9 (2) : 431-436. doi: 10.3934/jimo.2013.9.431
References:
[1]

C. Bagley and U. Yaari, Financial leverage strategy with transaction costs, Applied Mathematical Finance, 3 (1996), 191-208. Google Scholar

[2]

S. Bhagat and R. Jefferis, "The Econometrics of Corporate Governance Studies," MIT Press, Cambridge, 2002. Google Scholar

[3]

S. Dasgupta and S. Titman, Pricing strategy and financial policy, The Review of Financial Studies, 11 (1998), 705-737. Google Scholar

[4]

E. J. Elton and M. J. Gruber, "Finance as a Dynamic Process," Prentice Hall, New Jersey, 1975. Google Scholar

[5]

R. Heinrich, "Complementarities in Corporate Governance," Springer, New York, 2002. Google Scholar

[6]

T. O. Leauter, "Corporate Risk Mamnagement for Value Creation: A Guide to Real Life Applications," Risk Books, London, 2007. Google Scholar

[7]

João Amaro de Matos, "Theoretical Foundations of Corporate Finance," Princeton University Press, Princeton and Oxford, 2001. Google Scholar

[8]

F. Modigliani and M. Miller, The cost of capital corporation finance and the theory of investment, American Economic Review, 48 (1958), 261-297. Google Scholar

[9]

F. Modigliani and M. Miller, Corporate income taxes and the cost of capital: A correction, American Economic Review, 53 (1963), 433-443. Google Scholar

[10]

E. Morellec, Asset liquidity, capital structure, and secured debt, Journal of Financial Economics, 61 (2001), 173-206. Google Scholar

[11]

R. Morin and S. Jarrell, "Driving Shareholders Value: Value-Building Techniques for Creating Shareholder Wealth," McGraw-Hill Publishers, Sydney, 2001. Google Scholar

[12]

S. C. Myers, Still searching for cptimal capital sttructure, Journal of Applied Corporate Finance, 6 (1993), 4-4. Google Scholar

[13]

J. Tirole, "The Theory of Corporate Finance," Princeton University Press, 2006. Google Scholar

[14]

S. Titman and S. Tsyplakov, A dynamic model of optimal capital structure, Review of Finance, 11 (2007), 401-451. Google Scholar

[15]

M. Vebeek, "A Guide to Modern Econometrics," Wiley, UK, 2012. Google Scholar

show all references

References:
[1]

C. Bagley and U. Yaari, Financial leverage strategy with transaction costs, Applied Mathematical Finance, 3 (1996), 191-208. Google Scholar

[2]

S. Bhagat and R. Jefferis, "The Econometrics of Corporate Governance Studies," MIT Press, Cambridge, 2002. Google Scholar

[3]

S. Dasgupta and S. Titman, Pricing strategy and financial policy, The Review of Financial Studies, 11 (1998), 705-737. Google Scholar

[4]

E. J. Elton and M. J. Gruber, "Finance as a Dynamic Process," Prentice Hall, New Jersey, 1975. Google Scholar

[5]

R. Heinrich, "Complementarities in Corporate Governance," Springer, New York, 2002. Google Scholar

[6]

T. O. Leauter, "Corporate Risk Mamnagement for Value Creation: A Guide to Real Life Applications," Risk Books, London, 2007. Google Scholar

[7]

João Amaro de Matos, "Theoretical Foundations of Corporate Finance," Princeton University Press, Princeton and Oxford, 2001. Google Scholar

[8]

F. Modigliani and M. Miller, The cost of capital corporation finance and the theory of investment, American Economic Review, 48 (1958), 261-297. Google Scholar

[9]

F. Modigliani and M. Miller, Corporate income taxes and the cost of capital: A correction, American Economic Review, 53 (1963), 433-443. Google Scholar

[10]

E. Morellec, Asset liquidity, capital structure, and secured debt, Journal of Financial Economics, 61 (2001), 173-206. Google Scholar

[11]

R. Morin and S. Jarrell, "Driving Shareholders Value: Value-Building Techniques for Creating Shareholder Wealth," McGraw-Hill Publishers, Sydney, 2001. Google Scholar

[12]

S. C. Myers, Still searching for cptimal capital sttructure, Journal of Applied Corporate Finance, 6 (1993), 4-4. Google Scholar

[13]

J. Tirole, "The Theory of Corporate Finance," Princeton University Press, 2006. Google Scholar

[14]

S. Titman and S. Tsyplakov, A dynamic model of optimal capital structure, Review of Finance, 11 (2007), 401-451. Google Scholar

[15]

M. Vebeek, "A Guide to Modern Econometrics," Wiley, UK, 2012. Google Scholar

[1]

Jinying Ma, Honglei Xu. Empirical analysis and optimization of capital structure adjustment. Journal of Industrial & Management Optimization, 2020, 16 (3) : 1037-1047. doi: 10.3934/jimo.2018191
[2]

Hong Zhang, Fei Yang. Optimization of capital structure in real estate enterprises. Journal of Industrial & Management Optimization, 2015, 11 (3) : 969-983. doi: 10.3934/jimo.2015.11.969
[3]

Xinyu Song, Liming Cai, U. Neumann. Ratio-dependent predator-prey system with stage structure for prey. Discrete & Continuous Dynamical Systems - B, 2004, 4 (3) : 747-758. doi: 10.3934/dcdsb.2004.4.747
[4]

Matthew Foreman, Benjamin Weiss. From odometers to circular systems: A global structure theorem. Journal of Modern Dynamics, 2019, 15: 345-423. doi: 10.3934/jmd.2019024
[5]

Jaume Llibre, Claudio Vidal. Hopf periodic orbits for a ratio--dependent predator--prey model with stage structure. Discrete & Continuous Dynamical Systems - B, 2016, 21 (6) : 1859-1867. doi: 10.3934/dcdsb.2016026
[6]

Prabir Panja, Soovoojeet Jana, Shyamal kumar Mondal. Dynamics of a stage structure prey-predator model with ratio-dependent functional response and anti-predator behavior of adult prey. Numerical Algebra, Control & Optimization, 2021, 11 (3) : 391-405. doi: 10.3934/naco.2020033
[7]

Zheng-Jian Bai, Xiao-Qing Jin, Seak-Weng Vong. On some inverse singular value problems with Toeplitz-related structure. Numerical Algebra, Control & Optimization, 2012, 2 (1) : 187-192. doi: 10.3934/naco.2012.2.187
[8]

Jeffrey W. Lyons. An application of an avery type fixed point theorem to a second order antiperiodic boundary value problem. Conference Publications, 2015, 2015 (special) : 775-782. doi: 10.3934/proc.2015.0775
[9]

Juan Kalemkerian, Andrés Sosa. Long-range dependence in the volatility of returns in Uruguayan sovereign debt indices. Journal of Dynamics & Games, 2020, 7 (3) : 225-237. doi: 10.3934/jdg.2020016
[10]

Cheng-Kang Chen, Yi-Xiang Liao. A deteriorating inventory model for an intermediary firm under return on inventory investment maximization. Journal of Industrial & Management Optimization, 2014, 10 (4) : 989-1000. doi: 10.3934/jimo.2014.10.989
[11]

Qian Zhao, Zhuo Jin, Jiaqin Wei. Optimal investment and dividend payment strategies with debt management and reinsurance. Journal of Industrial & Management Optimization, 2018, 14 (4) : 1323-1348. doi: 10.3934/jimo.2018009
[12]

Hong Fu, Mingwu Liu, Bo Chen. Supplier's investment in manufacturer's quality improvement with equity holding. Journal of Industrial & Management Optimization, 2021, 17 (2) : 649-668. doi: 10.3934/jimo.2019127
[13]

Yaling Cui, Srdjan D. Stojanovic. Equity valuation under stock dilution and buy-back. Discrete & Continuous Dynamical Systems - B, 2012, 17 (6) : 1809-1829. doi: 10.3934/dcdsb.2012.17.1809
[14]

Miguel Atencia, Esther García-Garaluz, Gonzalo Joya. The ratio of hidden HIV infection in Cuba. Mathematical Biosciences & Engineering, 2013, 10 (4) : 959-977. doi: 10.3934/mbe.2013.10.959
[15]

Alberto Bressan, Yilun Jiang. The vanishing viscosity limit for a system of H-J equations related to a debt management problem. Discrete & Continuous Dynamical Systems - S, 2018, 11 (5) : 793-824. doi: 10.3934/dcdss.2018050
[16]

Ruopeng Wang, Jinting Wang, Chang Sun. Optimal pricing and inventory management for a loss averse firm when facing strategic customers. Journal of Industrial & Management Optimization, 2018, 14 (4) : 1521-1544. doi: 10.3934/jimo.2018019
[17]

Qianru li, Weida chen, Yongming zhang. Optimal production and emission reduction policies for a remanufacturing firm considering deferred payment strategy. Journal of Industrial & Management Optimization, 2021, 17 (5) : 2475-2503. doi: 10.3934/jimo.2020078
[18]

Davide La Torre, Simone Marsiglio, Franklin Mendivil, Fabio Privileggi. Public debt dynamics under ambiguity by means of iterated function systems on density functions. Discrete & Continuous Dynamical Systems - B, 2021, 26 (11) : 5873-5903. doi: 10.3934/dcdsb.2021070
[19]

Ming-hui Wang, Nan-jing Huang, Donal O'Regan. Optimal product release time for a new high-tech startup firm under technical uncertainty. Journal of Industrial & Management Optimization, 2021  doi: 10.3934/jimo.2021186
[20]

Simon Levin, Anastasios Xepapadeas. Transboundary capital and pollution flows and the emergence of regional inequalities. Discrete & Continuous Dynamical Systems - B, 2017, 22 (3) : 913-922. doi: 10.3934/dcdsb.2017046

2020 Impact Factor: 1.801

Tools

Metrics

  • PDF downloads (99)
  • HTML views (0)
  • Cited by (0)

Other articles
by authors

[Back to Top]

Copyright © 2022 American Institute of Mathematical Sciences | Privacy Policy