The Joint Problem of Investment and Financing

Abstract

A programming model of project selection is extended to include the issue of new equity as one of the activities.This allows the marginal cost of capital, in each year up to a planning horizon, to be determined within the model.It also allows pre-horizon decisions to be uncoupled, under plausible assumptions, from the consideration of post-horizon opportunities.The model is used to specify optimal joint strategies for financing and investment, and to analyse complex projects-e.g. acquisitions-which affect both financial structure and the supply of profitable opportunities. Interactions between project selection, financing policy and dividend policy are illustrated and the results are contrasted with those derived from familiar decision-rules.

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