 Applications to Finance Applications to financeChapter 5 in Optimal Control Theory, 2021, pp 145-174 from Springer Abstract: Abstract An important area of finance involves making decisions regarding investment and dividend policies over time and ways to finance them. Among the ways of financing are issuing equity, retaining earnings, and borrowing money. This chapter deal with two different problems relating to a firm. Section 5.1 treats a cash balance problem, which in its simplest form, is a problem of controlling the level of a firm’s cash balances to meet its demand for cash at the minimum total cost. The problem is solved explicitly using the maximum principle. Section 5.2 deals with the optimal equity financing of a corporate firm by determining the optimal dividend path along with new equity issued over time to maximize the value of the firm. To obtain the optimal path, we synthesize an optimal sequence of subcases, obtained using the maximum principle, by employing a switching-point analysis based on a reverse-time construction technique. Moreover and importantly, the chapter provides financial interpretations for the various functions such as the Hamiltonian and the adjoint functions that arise in the course of the analysis. There are many exercises at the end of the chapter. Date: 2021 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-030-91745-6_5 Ordering information: This item can be ordered from DOI: 10.1007/978-3-030-91745-6_5 Access Statistics for this chapter More chapters in Springer Texts in Business and Economics from Springer |
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