Capital Structure, Financial Flexibility and Real Options

PurposeThe purpose of this paper is to present a model to value leveraged firms in the presence of default risk and bankruptcy costs under a flexible firm’s debt structure.Design/methodology/approachThe authors assume that the total debt of the ﬁrm is a combination of two debt components. The ﬁrst component is an active debt component which is assumed to be proportional to the ﬁrm’s value. The second one is a passive predetermined risk-free debt component. The combination of the two debt categories makes the ﬁrm’s capital structure more realistic and allows us to include ﬂexibility into the ﬁrm’s debt structure management. The ﬁrm’s valuation is performed using the discounted cash flow technique based on the weighted average cost of capital (WACC) method.FindingsThe model can be used to define active debt management strategies that can induce the firm to deviate from its capital structure target in order to preserve debt capacity for future funding needs. The firm’s valuation is performed by using the WACC method and a closed form valuation formula is provided. Such a formula can be used to value costs and benefits of financial flexibility.Research limitations/implicationsThe proposed approach provides a good compromise between mathematical complexity and model capability of interpreting the various economic and financial aspects involved in the firm’s debt structure puzzle.Practical implicationsThis model offers a realistic approach to practical applications where real financing decisions are characterized by a simultaneous use of these two debt categories. By comparing costs and benefits deriving from using unused debt capacity for future funding needs, the model provides a quantitative support to investigate if financial flexibility can add value to firms.Originality/valueTo the authors knowledge, the approach the authors propose is the first attempt to build a valuation scheme that accounts for firm’s financial flexibility under default risky debt and bankruptcy costs. Including financial flexibility, this model fills an important gap in the literature on this topic.

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Financial Flexibility and Capital Structure Decision

SSRN Electronic Journal ◽

10.2139/ssrn.1108850 ◽

2011 ◽

Cited By ~ 26

Author(s):

Soku Byoun

Keyword(s):

Capital Structure ◽

Financial Flexibility

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Real Options and Interactions with Financial Flexibility

Financial Management ◽

10.2307/3665939 ◽

1993 ◽

Vol 22 (3) ◽

pp. 202 ◽

Cited By ~ 313

Author(s):

Lenos Trigeorgis

Keyword(s):

Real Options ◽

Financial Flexibility

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What Determines The Capital Structure of Property, Real Estate and Building Construction Companies? Evidence from Indonesian Listed Companies

Management Analysis Journal ◽

10.15294/maj.v9i4.40634 ◽

2020 ◽

Vol 9 (4) ◽

pp. 370-382

Author(s):

Sari Fitri Fatimah ◽

Rini Setyo Witiastuti

Keyword(s):

Real Estate ◽

Capital Structure ◽

Firm Size ◽

Stock Exchange ◽

Building Construction ◽

Business Risk ◽

Financial Flexibility ◽

Significant Negative Effect ◽

Negative Effect ◽

The Capital Structure

This research is intended to prove the influence of financial flexibility, asset structure, firm size, profitability and business risk on the capital structure. The population on this study are property, real estate and building construction sector that are listed on the Indonesia Stock Exchange in 2009-2018. The number of samples used were 28 companies with a purposive sampling method. The data studied was obtained from the Indonesia Stock Exchange (IDX). Methods of data analysis used in this study is multiple linear regression. The results showed that financial flexibility has not significant negative effect on capital structure. Asset structure and firm size have a significant positive effect on capital structure. The profitability and business risk have a significant negative effect on capital structure. Further research is needed to use another proxies such as ROE for profitability variables or standard deviations from ROE for business risk on capital structure and add another sectors or the number of observation periods.

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Multinational Capital Structure and Financial Flexibility

SSRN Electronic Journal ◽

10.2139/ssrn.217569 ◽

2000 ◽

Cited By ~ 1

Author(s):

Kuljot Singh ◽

James E. Hodder

Keyword(s):

Capital Structure ◽

Financial Flexibility

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Capital structure and corporate performance in late Imperial Russia

European Review of Economic History ◽

10.1093/ereh/hey020 ◽

2018 ◽

Vol 23 (4) ◽

pp. 446-481

Author(s):

Amanda Gregg ◽

Steven Nafziger

Keyword(s):

Capital Structure ◽

Corporate Finance ◽

Market Power ◽

Corporate Performance ◽

Balance Sheet ◽

Financial Flexibility ◽

Late Imperial ◽

Imperial Russia ◽

Russian Economy ◽

Accounts Payable

Abstract This article investigates the financing of corporations in industrialization’s early stages by examining new balance sheet data describing all Imperial Russian corporations in 1914. We emphasize differences between two Russian corporation types: share partnerships and A-corporations. Share partnerships issued greater dividends, were less likely to issue bonds, and had larger accounts payable. We find that capital structures varied with age, size, and sector according to modern corporate finance theories and that scaled profits did not demonstrate differential market power across corporation types. Thus, Russian corporations exhibited considerable financial flexibility, and reducing incorporation costs could have benefited the Imperial Russian economy.

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