Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-28T18:23:22.782Z Has data issue: false hasContentIssue false
  • English
  • Français

Ruin Considerations: Optimal Working Capital and Capital Structure

Published online by Cambridge University Press:  19 October 2009

H. Bierman ,
K. Chopra  and
J. Thomas
Get access Rights & Permissions [Opens in a new window]

Extract

At any point in time a firm must decide both the level of working capital consistent with its productive assets and how to finance these assets. Academic theorists in business administration have traditionally approached decision making of the firm on a segmented rather than on a global basis and have been satisfied with developing suboptinizing decision rules. Thus there has been concern about managing working capital and concern about choosing the optimum capital structure, but traditionally the two decisions have not been made jointly. And even if they were made jointly, decisions would still remain in the working capital area involving inventories, credit granting, and marketable securities. This paper is an attempt to interrelate working capital and capital structure decisions with working capital used not only as a buffer to avoid ruin but also to affect sales via changing inventory levels and credit policies. The possibility of ruin introduces a discontinuity that precludes perfect elimination of leverage effects via a market.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 10 , Issue 1 , March 1975 , pp. 119 - 128
Copyright
Copyright © School of Business Administration, University of Washington 1975

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

[1]Baumol, W. J., and Malkiel, B. G.. “The Firm's Optimal Debt-Equity Combination and the Cost of Capital.” The Quarterly Journal of Economics, November 1967, pp. 547–578.CrossRefGoogle Scholar
[2]Baxter, N. D. “Coverage, Risk of Ruin and the Cost of Capital.” The Journal of Finance, September 1967, pp. 395–403.Google Scholar
[3]Bierman, H., and Thomas, J.. “Ruin Considerations and Debt Issuance.” The Journal of Financial and Quantitative Analysis, January 1972, pp. 1361–1378.CrossRefGoogle Scholar
[4]Borch, K. “The Capital Structure of a Firm.” Swedish Journal of Economics, 1969, pp. 1–13.CrossRefGoogle Scholar
[5]Fama, E. “Multiperiod Consumption-Investment Decisions.” American Economic Review, March 1970.Google Scholar
[6]Eppen, G., and Fama, E.. “Solutions for Cash Balance and Simple Dynamic-Portfolio Problems.” The Journal of Business, January 1968, pp. 94–112.CrossRefGoogle Scholar
[7]Eppen, G., and Fama, E.. “Optimal Policies for Cash Balance and Simple Dynamic Portfolio Models with Proportional Costs.” International Economic Review, June 1969, pp. 119–133.CrossRefGoogle Scholar
[8]Feller, W.An Introduction to Probability Theory and Its Application, Vol. 1. New York: John Wiley, 1957.Google Scholar
[9]Hamada, R. S. “Portfolio Analysis, Market Equilibrium and Corporation Finance.” The Journal of Finance, March 1969, pp. 13–31.CrossRefGoogle Scholar
[10]Howard, R. A.Dynamic Programming and Markov Processes. New York: John Wiley, 1960.Google Scholar
[11]Smidt, S., and Bierman, H. Jr. “Application of the Capital Asset Pricing Model to Multi-Period Investments.” Cornell Working Paper, 1974.Google Scholar
[12]Van Home, J. “A Risk-Return Analysis of a Firm's Working Capital Position.” The Engineering Economist, Winter 1969, pp. 71–89.CrossRefGoogle Scholar