Costly Financing, Optimal Payout Policies and the Valuation of Corporate Debt
AbstractWe present a cash-flow based model of corporate debt valuation that incorporates two novel features. First, we allow for the separation and optimal determination of the firm's debt-service and dividend policies; in particular, the firm is allowed to maintain cash reserves to meet future debt obligations. Second, our model admits the possibility that raising resources through issuance of new equity could be a costly procedure. In contrast, much of the previous literature has considered only dividend polices that are the "residual" consequences of debt-service policy, and has assumed new equity issuance costs are either zero or infinite.
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Bibliographic InfoPaper provided by New York University, Leonard N. Stern School of Business- in its series New York University, Leonard N. Stern School Finance Department Working Paper Seires with number 99-048.
Date of creation: 31 Jul 2000
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Postal: U.S.A.; New York University, Leonard N. Stern School of Business, Department of Economics . 44 West 4th Street. New York, New York 10012-1126
Phone: (212) 998-0100
Web page: http://w4.stern.nyu.edu/finance/
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-10-31 (All new papers)
- NEP-CFN-2000-10-31 (Corporate Finance)
- NEP-FIN-2000-10-31 (Finance)
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