Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T09:59:18.708Z Has data issue: false hasContentIssue false
  • English
  • Français

The Firm's Optimal Financial Policies: Solution, Equilibrium, and Stability

Published online by Cambridge University Press:  19 October 2009

Andrew J. Senchack Jr.
Get access Rights & Permissions [Opens in a new window]

Extract

A financial decision model of the firm, in which most prior deterministic decision models' assumptions were relaxed, was developed and solved for its policy and state variables' time-optimal trajectories. In particular, the three alternative modes of corporate financing, with their respective explicit and implicit costs, were treated as distinct, time-variant decision variables. In addition, their dynamic interdependent relationship with the firm's investment-possibilities schedule was clearly delineated. Besides eliminating the usual constant returns assumption, our model further introduced a dividends discount factor which was an explicit function of the firm's debt-equity ratio.

Furthermore, despite the generality of the model solutions, valuable economic implications were determined; namely, (1) conditions for the existence of a steady-state equilibrium were established with the critical role of nonproportional external equity flotation costs being observed; (2) the firm's dynamic equilibrium path was locally unstable in the initial, high-growth phase of its life cycle and was locally stable in its declining-growth stage–a result consistent with the growth literature in security valu ation theory; and (3) the usual assumptions of the balanced-growth path models are sufficient for the optimality of their decision policies.

Type
II. Corporate Financing Decisions
Information
Journal of Financial and Quantitative Analysis , Volume 10 , Issue 4 , November 1975 , pp. 543 - 555
Copyright
Copyright © School of Business Administration, University of Washington 1975

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Arrow, K. J. “Applications of Control Theory to Economic Growth.” Technical Report No. 2. Stanford: Institute for Mathematical Studies in the Social Sciences (1967).Google Scholar
[2]Brigham, E. F., and Pappas, J. L.. “Duration of Growth, Changes in Growth Rates, and Corporate Share Prices.” Financial Analysts Journal, vol. 10 (May–June 1966), pp. 1–6.Google Scholar
[3]Davis, B. “Investment and Rate of Return for the Regulated Firm” Bell Journal of Economics and Management Science, vol. 1 (Autumn 1970), pp. 245–270.Google Scholar
[4]Dorfman, R. “An Economic Interpretation of Optimal Control Theory” American Economic Review, vol. 59 (December 1969), pp. 817–831.Google Scholar
[5]Gordon, M. J.The Investment, Financing, and Valuation of the Corporation. Homewood, Illinois: Richard D. Irwin (1962).Google Scholar
[6]Hicks, J. R.Value and Capital, 2nd ed.London: Oxford University Press (1946).Google Scholar
[7]Holt, C. C. “The Influence of Growth Duration on Share Prices” Journal of Finance, vol. 17 (September 1962), pp. 465–475.Google Scholar
[8]Intrilligator, M. D.Mathematical Opoimization and Economic Theory. Englewood Cliffs, N.J.: Prentice-Hall (1971).Google Scholar
[9]Krouse, C. G. “Optimal Financing and Capital Structure Programs for the Firm” Journai of Finance, vol. 27 (December 1972), pp. 1057–1072.CrossRefGoogle Scholar
[10]Krouse, C. G., and Lee, W. Y.. “Optimal Equity Financing of the Corporation.” Journal of Financial and Quantitative Analysis, vol. 8 (September 1973), pp. 539–564CrossRefGoogle Scholar
[11]Lerner, E. M., and Carleton, W. T.. “The Integration of Capital Budgeting and Stock Valuation” American Economic Review, vol. 54 (September 1964), pp. 683–702.Google Scholar
[12]Lintner, J. “The Cost of Capital and Optimal Financing of Corporate Growth” Journal of Finance, vol. 13 (May 1963), pp. 292–310.CrossRefGoogle Scholar
[13]Lintner, J. “Optimal Dividends, Corporate Growth, and Uncertainty” Quarterly Journal of Economics, vol. 78 (February 1964), pp. 49–95.CrossRefGoogle Scholar
[14]Miller, M. H., and Modigliani, F.. “Dividend Policy, Growth, and the Valuation of Shares” Journal of Business, vol. 34 (October 1961), pp. 411–433.CrossRefGoogle Scholar
[15]Modigliani, F., and Miller, M. H.. “The Cost of Capital, Corporation Finance, and the Theory of Investment” American Economic Review, vol. 49 (June 1958), pp. 261–298.Google Scholar
[16]Senchack, A. J. “A Control-Theoretic Approach to the Corporation's Optimal Investment-Financing-Dividend Decision.” University of Texas Working Paper no. 75–15. Austin, Texas: Bureau of Business Research.Google Scholar
[17]Soldofsky, R. M. “The History of Bond Tables and Stock Valuation Models.” Journal of Finance, vol. 21 (March 1966).CrossRefGoogle Scholar
[18]Wendt, P. F. “Current Growth Stock Valuation Methods.” Financial Analysts Journal, vol. 9 (March–April 1965), pp. 91–103.CrossRefGoogle Scholar