Capital Structure Model (CSM): correction, constraints, and applications
This paper extends the Capital Structure Model (CSM) research by performing the following tasks. First, a correction is offered on the corporate tax rate adjustment found in the break-through concept of the levered equity growth rate (gL) given by Hull (2010). This correction is important because gL...
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| Format: | Article |
| Language: | English |
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LLC "CPC "Business Perspectives"
2018-03-01
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| Series: | Investment Management & Financial Innovations |
| Subjects: | |
| Online Access: | https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/10094/imfi_2018_01_Hull.pdf |
| _version_ | 1818208842940416000 |
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| author | Robert M. Hull |
| author_facet | Robert M. Hull |
| author_sort | Robert M. Hull |
| collection | DOAJ |
| description | This paper extends the Capital Structure Model (CSM) research by performing the following tasks. First, a correction is offered on the corporate tax rate adjustment found in the break-through concept of the levered equity growth rate (gL) given by Hull (2010). This correction is important because gL links the plowback-payout and debt-equity choices and so its accuracy is paramount. Second, this paper introduces a retained earnings (RE) constraint missing from the CSM growth research when a firm finances with internal equity. The RE constraint governs the plowback-payout and debt-equity choices through the interdependent relation between RE and interest payments (I). Third, a by-product of the RE constraint is a second constraint that governs a no-growth situation so that I does not exceed the available cash flows. Fourth, with the gL correction and two constraints in place, updated applications of prior research and new applications are provided. These applications reveal lower gain to leverage (GL) values than previously reported with more symmetry around the optimal debt-to-equity ratio (ODE) while minimizing steep drop-offs in firm value. For larger plowback ratios, the optimal debt level choice can change. The new constraints serve to point out the need for further research to incorporate external financing within the CSM framework. |
| first_indexed | 2024-12-12T04:51:15Z |
| format | Article |
| id | doaj.art-b1ded49afcba4aaea8e815452158e347 |
| institution | Directory Open Access Journal |
| issn | 1810-4967 1812-9358 |
| language | English |
| last_indexed | 2024-12-12T04:51:15Z |
| publishDate | 2018-03-01 |
| publisher | LLC "CPC "Business Perspectives" |
| record_format | Article |
| series | Investment Management & Financial Innovations |
| spelling | doaj.art-b1ded49afcba4aaea8e815452158e3472022-12-22T00:37:28ZengLLC "CPC "Business Perspectives"Investment Management & Financial Innovations1810-49671812-93582018-03-0115124526210.21511/imfi.15(1).2018.2110094Capital Structure Model (CSM): correction, constraints, and applicationsRobert M. Hull0Professor, Clarence W. King Endowed Chair in Finance, Washburn University School of BusinessThis paper extends the Capital Structure Model (CSM) research by performing the following tasks. First, a correction is offered on the corporate tax rate adjustment found in the break-through concept of the levered equity growth rate (gL) given by Hull (2010). This correction is important because gL links the plowback-payout and debt-equity choices and so its accuracy is paramount. Second, this paper introduces a retained earnings (RE) constraint missing from the CSM growth research when a firm finances with internal equity. The RE constraint governs the plowback-payout and debt-equity choices through the interdependent relation between RE and interest payments (I). Third, a by-product of the RE constraint is a second constraint that governs a no-growth situation so that I does not exceed the available cash flows. Fourth, with the gL correction and two constraints in place, updated applications of prior research and new applications are provided. These applications reveal lower gain to leverage (GL) values than previously reported with more symmetry around the optimal debt-to-equity ratio (ODE) while minimizing steep drop-offs in firm value. For larger plowback ratios, the optimal debt level choice can change. The new constraints serve to point out the need for further research to incorporate external financing within the CSM framework.https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/10094/imfi_2018_01_Hull.pdfCapital Structure Modelgain to leveragelevered equity growth rate |
| spellingShingle | Robert M. Hull Capital Structure Model (CSM): correction, constraints, and applications Investment Management & Financial Innovations Capital Structure Model gain to leverage levered equity growth rate |
| title | Capital Structure Model (CSM): correction, constraints, and applications |
| title_full | Capital Structure Model (CSM): correction, constraints, and applications |
| title_fullStr | Capital Structure Model (CSM): correction, constraints, and applications |
| title_full_unstemmed | Capital Structure Model (CSM): correction, constraints, and applications |
| title_short | Capital Structure Model (CSM): correction, constraints, and applications |
| title_sort | capital structure model csm correction constraints and applications |
| topic | Capital Structure Model gain to leverage levered equity growth rate |
| url | https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/10094/imfi_2018_01_Hull.pdf |
| work_keys_str_mv | AT robertmhull capitalstructuremodelcsmcorrectionconstraintsandapplications |