An Integrated Model for the Cost-Minimizing Funding of Corporate Activities Over Time

To enhance the value of a firm, the firm’s management must attempt to minimize the total discounted cost of financing over a planning horizon. Unfortunately, the variety of sources of funds and the constraints that may be imposed on accessing funds from any one source make this exercise a difficult task. The model presented and illustrated here accomplishes this task considering issuing new equity and new bonds, refunding the bonds, borrowing short term from financial institutions, temporarily parking surplus funds in short-term securities, repurchasing its stock, and retaining part or all of a firm’s earnings. The proportions of these sources of funds are determined subject to their associated costs and various constraints such as not exceeding a specific debt/equity ratio and following a stable dividend policy, among others.