HIGH UNCERTAINTY FINANCING

Nick Georgiopoulos ()
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Nick Georgiopoulos: Financial Stability Department, Bermuda Monetary Authority, 43 Victoria Street, Hamilton, Pembroke, Bermuda

International Journal of Theoretical and Applied Finance (IJTAF), 2017, vol. 20, issue 07, 1-24

Abstract: In this paper, we study the financing of high uncertainty projects. High uncertainty is defined as the lack of knowledge of whether growth options exist. In this paper, we will describe this uncertainty by a probability distribution which describes the arrival of a growth option at a deterministic time. Once the option arrives, an additional uncertainty exists since it is not certain that it is profitable to exercise it. We value the corporate securities with contingent claims valuation both for a whole equity-financed firm and a debt-equity-financed firm. Unlike traditional capital structure models, we find nonconvex value functions for the firm vis-a-vis the debt coupon under specific parametrizations. High and low leverage can yield similar firm value maximizing policies.

Keywords: Contingent claims; capital structure; real options; capital budgeting (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:20:y:2017:i:07:n:s0219024917500431

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DOI: 10.1142/S0219024917500431

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