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

Full text for this resource is not available from the Research Repository.

Craven, Bruce Desmond and Islam, Sardar M. N (2013) An optimal financing model: Implications for existence of optimal capital structure. Journal of Industrial and Management Optimization, 9 (2). 431 - 436. ISSN 1547-5816


Modigliani and Miller's argument of the irrelevance of the debtequity 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 debtequity 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.

Dimensions Badge

Altmetric Badge

Item type Article
DOI 10.3934/jimo.2013.9.431
Official URL
Subjects Historical > FOR Classification > 0102 Applied Mathematics
Historical > FOR Classification > 0103 Numerical and Computational Mathematics
Historical > Faculty/School/Research Centre/Department > College of Business
Keywords capital structure; irrelevance theorem; value of a firm; debt-equity ratio
Citations in Scopus 1 - View on Scopus
Download/View statistics View download statistics for this item

Search Google Scholar

Repository staff login