Optimal Equity Financing of the Corporation

Optimal Control Theory

“…The model to be discussed is due to Krouse and Lee (1973), with corrections and extensions due to Sethi (1978b). The problem of the optimal financing of the firm can be formulated as an optimal control problem.…”

“…The problem of the optimal financing of the firm can be formulated as an optimal control problem. The formulations, such as those of Davis (1970), Krouse (1972), and Krouse and Lee (1973), permit the firm to finance its investments by retained earnings, debt, and/or external equity in various proportions which may vary over time. Note that earnings not retained are paid out as dividends to the firm's stockholders.…”

Optimal Equity and Financing Model of Krouse and Lee: Corrections and Extensions

“…CORRECTIONS AND EXTENSIONS Suresh P. Sethi* Krouse and Lee [5] have formulated an optimal financing problem of a firm in the dynamic setting of optimal control theory. Specifically, the problem is to find a financing mix of retained earnings and external equity over time in a way that maximizes the present value of the entire future dividends stream accruing to the firm's initial stockholders subject to a given maximum allowable growth rate for the firm.…”

Financing policies via stochastic control: a dynamic programming approach

“…For their purposes, they formulate and explicitly solve a singular stochastic control problem. Sethi and Taksar (2002) is the stochastic extension of the deterministic model stated in Krouse and Lee (1973) and improved in Sethi (1978). Caballero and Pindyck (1996) also provide an answer to Q2.…”