Target Rates of Return and Corporate Asset and Liability Structure Under Uncertainty

R. H. Litzenberger and O. M. Joy

Journal of Financial and Quantitative Analysis, 1971, vol. 6, issue 2, 675-686

Abstract: This paper examines the multiperiod capital allocation problem of a corporate division that is subject to ex post financial scrutiny by the parent corporation based upon meeting a specified target rate of return on investment. Using a zero-order decision rule, a deterministic equivalent linear programming model is developed to solve for the division's optimal mix of productive assets and the maturity structure of its debt.

Date: 1971
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