Abstract

http://ssrn.com/abstract=2182134
 
 

References (19)



 
 

Footnotes (1)



 


 



Valuation of Shares and Equity Financing in an Economy with Frictions but No Leverage: The Value of Retained Earnings


Thomas E. Copeland


University of San Diego - School of Business Administration

Andrew Lyasoff


Boston University - School of Management

January 21, 2005

Boston U. School of Management Research Paper No. 2013-1

Abstract:     
We develop a pricing method and derive an optimal equity financing strategy for a unlevered firm with constant production cost, constant production rate, stochastic output price and an option to expand in a non-competitive economy. The effects of taxes, transaction costs and non-liquidity on the share values and the optimal equity financing policy is studied. Shares of common stock in the firm are treated as contingent claims on two underlying instruments: the firm's retained earnings and the stochastic output price. The paper presents a numerical procedure for computing both the share value and the marginal rate of substitution of retained earnings (MRSRI). It is shown that in the absence of taxes and transaction costs, the MRSRI for a perfectly liquid firm is reduced to the constant 1 — this is a restatement of the classical Modigliani-Miller proposition in the context of dynamic programming. The study of the MRSRI in an economy with frictions may be viewed as an extension of the Modigliani-Miller proposition.

Number of Pages in PDF File: 52

Keywords: Dividend Policy, Theory of the Firm

JEL Classification: G30, G32, G35

working papers series





Download This Paper

Date posted: November 29, 2012 ; Last revised: December 10, 2013

Suggested Citation

Copeland, Thomas E. and Lyasoff, Andrew, Valuation of Shares and Equity Financing in an Economy with Frictions but No Leverage: The Value of Retained Earnings (January 21, 2005). Boston U. School of Management Research Paper No. 2013-1. Available at SSRN: http://ssrn.com/abstract=2182134 or http://dx.doi.org/10.2139/ssrn.2182134

Contact Information

Thomas E. Copeland (Contact Author)
University of San Diego - School of Business Administration ( email )
5998 Alcala Park
San Diego, CA 92110-2492
United States
Andrew Lyasoff
Boston University - School of Management ( email )
595 Commonwealth Avenue
Boston, MA MA 02215
United States
Feedback to SSRN


Paper statistics
Abstract Views: 408
Downloads: 88
Download Rank: 177,162
References:  19
Footnotes:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.297 seconds