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

Manak C. Gupta ()
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Manak C. Gupta: Fox School of Business, Temple University 428 Alter Hall, Philadelphia, PA 19122, U.S.A.

Review of Economics & Finance, 2016, vol. 6, 1-18

Abstract: 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.

Keywords: Cost-minimization; Discounted value; Financing costs; Financial constraints; Funding decisions; Funding requirements; Optimal financial policy; Optimization; Planning horizon; Sources of funds (search for similar items in EconPapers)
JEL-codes: C61 G32 G35 (search for similar items in EconPapers)
Date: 2016
Note: The author wishes to thank Dr. Carlson, Editor of the Review of Economics & Finance, and anonymous referees for their helpful comments and suggestions in the development of this paper. The financial support to computerize the model was provided by the Faculty Senate of Temple University.
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