A Decision Procedure for Capital Rationing Investment and Borrowing Decisions

Lohmann, Jack R.; Oakford, R. V.

doi:10.1080/00137918008902888

Cited by 4 publications

(10 citation statements)

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“…The work reported here extends that of Oakford et al (1979) by incorporating decisions to incur long-term debt as part of the overall capital rationing decision; and by studying the effects of long-term and short-term debt policies on the firm's capital growth rate and risk of ruin it thereby illustrates a methodology that a firm could use to evaluate alternative debt policies. This work also illustrates the kind of information a fum would need about itself to make such a study.…”

Section: Introductionmentioning

confidence: 92%

“…present value, would promise in the long run to maximize the firm's expected future wealth, provided that (1) the discount rate is well chosen (Oakford et al, 1968(Oakford et al, , 1970(Oakford et al, , -1979 and (2) the firm's line of short-term credit obviates the possibility of bankruptcy.…”

Section: The Decision Environmentmentioning

confidence: 99%

“…Since his decisions had to be based on incomplete and uncertain information, no decision procedure could assure attainment of his objective. However, Oakford et al (1979), provided evidence that a procedure which selects, at each periodic decision, the combination of investments and borrowing with the maximum net The Effects of Borrowing DER is an abbreviation for DebtlEquity Ratio FMI represents the fraction of budget planned for market investments in a FSD represents the fraction of short-term line of credit planned for financing H is the horizon time, the time beyond which the monetary consequences i represents an interest rateeither id or im.…”

Section: The Decision Environmentmentioning

confidence: 99%

“…s(J,t) represents an (actual) realiizttion of the random variable S(J,t) that will be realized if the decision maker selects productive investment J. present value, would promise in the long run to maximize the firm's expected future wealth, provided that (1) the discount rate is well chosen (Oakford et al, 1968(Oakford et al, , 1970(Oakford et al, , -1979(Oakford et al, , and 1981 and (2) the firm's line of short-term credit obviates the possibility of bankruptcy.…”

Section: The Decision Environmentmentioning

confidence: 99%

“…The debt policies modeled were based on the results of interviews (Lohmann, 1979 andLohmann andOakford, 1981) with senior financial executives regarding the basic factors and underlying motivations that influence debt policies in practice. Each debt policy was defmed by specifying two components: (1) the proportion of long-term debt (Debt/Equity Ratio, henceforth DER) to be maintained in the capital structure of the firm, and (2) the fraction of short-term debt to be used to finance productive investments.…”

Section: Debt Policiesmentioning

confidence: 99%

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The Effects of Borrowing on the Rate of Growth of Capital and the Risk of Ruin of a Firm

Lohmann

Oakford

1982

Business Fin & Account

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The research reported in this paper used Monte Carlo simulation to study the long term effects of borrowing policy on the rate of growth of capital and the risk (probability) of ruin of hypothetical firms, operating in explicitly described, realistic capital budgeting environments. The capital rationing environment is described explicitly. The debt policies modeled were based on the results of interviews with senior financial executives in eight major firms. The results indicate that three intuitively appealing ranking procedures performed equally well and all out‐performed a random selection decision procedure: yielding higher rates of capital growth with lower risks of ruin. In general, an aggressive borrowing policy resulted in a higher average capital growth rate for a firm but a conservative borrowing policy resulted in a lower risk of ruin. It is believed that the results provide some interesting insights which indicate that a computer simulation model could be used to aid management in the evaluation of their capital budgeting procedures and borrowing policies.

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Section: Introductionmentioning

confidence: 92%

Section: The Decision Environmentmentioning

confidence: 99%

Section: The Decision Environmentmentioning

confidence: 99%

Section: The Decision Environmentmentioning

confidence: 99%

Section: Debt Policiesmentioning

confidence: 99%

See 3 more Smart Citations