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Literature Review
Valuation is the process of determining the current worth of an asset or a company (Stanley, 1978). Financial economists have developed different valuation methods that can be applied to find the value of a company. The most commonly used methods are Asset-Based Methods, Free Cash Flow Methods and etc.
While going through the research papers, we found work of different authors,
Investment, Capital Structure, and Complementarities between Debt and New Equity
Author(s): Rune Stenbacka and Mihkel Tombak
Source: Management Science, Vol. 48, No. 2 (Feb., 2002),�
The following variables were used:
K, the sale of common and preferred stock; D, the long-term debt; W, the
retained earnings; /, the S&P Common Stock Rank ing; and INT, the interest rate.�
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In this study, the authors developed a model of simultaneous investment and financing decisions made by incumbent owners of firms in the presence of capital market imperfections. In the model, the firm's added value is generated by investment projects characterized by uncertainty. The authors made a distinction between incumbent and new shareholders. The incumbent owners maximize their value by determining the capital structure simultaneously with the magnitude of the investment program. Initially, the authors characterize theoretically how the optimal combination of debt and equity financing will depend on the firm's internal funds available for investment. This optimal combination of debt and equity depends on a tradeoff between the bankruptcy risk associated with debt and the dilution cost to incumbent shareholders of new equity. Their theory identifies conditions under which there would be complementarities between debt and new equity. Subsequently, the authors tested these predictions empirically on financial data for the years 1982-1992 on 3,119 publicly traded manufacturing and telecommunications corporations in the Standard and Poor's COMPUSTAT database. Their
Empirical analysis...