American Institute of Mathematical Sciences

• 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

 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.
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:

show all references

References:
 [1] Jumpei Inoue, Kousuke Kuto. On the unboundedness of the ratio of species and resources for the diffusive logistic equation. Discrete & Continuous Dynamical Systems - B, 2021, 26 (5) : 2441-2450. doi: 10.3934/dcdsb.2020186 [2] Emma D'Aniello, Saber Elaydi. The structure of $\omega$-limit sets of asymptotically non-autonomous discrete dynamical systems. Discrete & Continuous Dynamical Systems - B, 2020, 25 (3) : 903-915. doi: 10.3934/dcdsb.2019195 [3] Meiqiao Ai, Zhimin Zhang, Wenguang Yu. First passage problems of refracted jump diffusion processes and their applications in valuing equity-linked death benefits. Journal of Industrial & Management Optimization, 2021  doi: 10.3934/jimo.2021039 [4] M. Mahalingam, Parag Ravindran, U. Saravanan, K. R. Rajagopal. Two boundary value problems involving an inhomogeneous viscoelastic solid. Discrete & Continuous Dynamical Systems - S, 2017, 10 (6) : 1351-1373. doi: 10.3934/dcdss.2017072 [5] Brandy Rapatski, James Yorke. Modeling HIV outbreaks: The male to female prevalence ratio in the core population. Mathematical Biosciences & Engineering, 2009, 6 (1) : 135-143. doi: 10.3934/mbe.2009.6.135 [6] Fritz Gesztesy, Helge Holden, Johanna Michor, Gerald Teschl. The algebro-geometric initial value problem for the Ablowitz-Ladik hierarchy. Discrete & Continuous Dynamical Systems - A, 2010, 26 (1) : 151-196. doi: 10.3934/dcds.2010.26.151 [7] 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  doi: 10.3934/dcdsb.2021070 [8] Wen-Bin Yang, Yan-Ling Li, Jianhua Wu, Hai-Xia Li. Dynamics of a food chain model with ratio-dependent and modified Leslie-Gower functional responses. Discrete & Continuous Dynamical Systems - B, 2015, 20 (7) : 2269-2290. doi: 10.3934/dcdsb.2015.20.2269 [9] Reza Lotfi, Yahia Zare Mehrjerdi, Mir Saman Pishvaee, Ahmad Sadeghieh, Gerhard-Wilhelm Weber. A robust optimization model for sustainable and resilient closed-loop supply chain network design considering conditional value at risk. Numerical Algebra, Control & Optimization, 2021, 11 (2) : 221-253. doi: 10.3934/naco.2020023

2019 Impact Factor: 1.366