 On the trade-off between the leverage effect and real options thinking: A simulation-based model on metal mining investmentJyrki Savolainen, Mikael Collan, Kalevi Kyläheiko and Pasi Luukka International Journal of Production Economics, 2017, vol. 194, issue C, 43-51 Abstract: This paper studies the effects of financing conditions to managerial flexibility and project value and focuses on the point of view of the equity holder of a mining company. Simulation based analysis is performed with a dynamic system model of a metal mine investment. The leverage effect of the equity holder's discount rate change as a function of the debt/equity ratio is separately modelled. Our empirical results show that the choice of a financing structure is important for the value maximization for the equity holder, since different debt/equity ratios differently condition the management's ability to make operational decisions, such as temporary shut downs, which could raise the value of the mining project. The trade-off between the leverage effect (decreasing need for equity) and real option flexibility (increasing need for working capital) will be scrutinized both theoretically and by using simulation-based analysis for numerical results. Keywords: Real options; Financial structure; Temporary closing; Metal mining; Optimal leverage (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:194:y:2017:i:c:p:43-51 DOI: 10.1016/j.ijpe.2017.06.002 Access Statistics for this article International Journal of Production Economics is currently edited by Stefan Minner More articles in International Journal of Production Economics from Elsevier |
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