Modeling real options to determine the optimal structure of corporate capital

Abstract

The paper deals with the problem of optimizing the capital structure. The capital structure theory appeared in the writings of Franco Modigliani and Merton Miller. There is currently no unified approach to solving this problem. Modern concepts of the capital structure theory suggest the existence of several alternative approaches to determining the optimal capital structure. We used the trade-off theory as a theoretical foundation for our research. Based on the trade-off theory, we try to lay the foundation for constructing models of practical significance into account advantages of other theoretical views to manage the capital structure of corporations. The static trade-off theory assures that that for any corporation at any time there is a value of the capital structure. This is called an optimal capital structure. The purpose of the dynamic trade-off theory is to define ways to achieve an optimal capital structure. In this paper, we examined the problems associated with the use of models, defining the optimal structure of capital in practice. The aim of our research is to establish a basis for the capital structure theory in the management of the corporation. To determine the optimal capital structure, we considered the evaluation of the weighted average cost of capital using a model of pricing options. The method of estimation of contingent claims in this case can be used to determine the value of equity, taking into account the risk of bankruptcy. Then optimal capital structure can be found only if the process model to take into account the existence of agency costs and distress costs. Key words: financing policy, financial risk and risk management, capital and ownership structure (real options, optimal capital structure)