Wilmott Magazine, November 2005

Visitor number 4982 as of March 17, 2005

Click on title/image to download paper (160kB, pdf)

A Generalised Procedure for Locating the Optimal Capital Structure

Ruben D. Cohen (ruben.cohen@citigroup.com)

Abstract

We present here a generalisation of an earlier approach for determining and locating the optimal capital structure of a corporate firm. The approach is the “maximum-value” methodology and the generalisation extends the original problem to one where the firm loses flexibility because of constraints and, therefore, has to move along a specific value-vs-leverage path to get to the optimal capital structure. A practical case of this could, for instance, be that the firm is forced to maintain a constant value while it increases or decreases its leverage. Other types of constraints are also considered and discussed.