Capital Structure Decisions: Evaluating Risk and Uncertainty

Chapter Fourteen

A Multiple-Objective Framework for Capital Structure Decisions

A Goal-Programming Approach to Decision Making*

EMPIRICAL BEHAVIOURAL STUDIES INDICATE that firms pursue multiple considerations while determining their capital structures. However, no attempt has been made so far to provide a deeper understanding of such considerations as goals or constraints, their priorities, and their relevance.

The approaches to capital structures that were discussed in previous chapters have the following two shortcomings:

1. Firms treat capital structure decisions as isolated decisions. The impact of other decisions is not captured in the decision-making process. Strategic actions and decisions are linked over the life of the firm and interact and influence one another during short-term and long-term time horizons.

2. Models formulated in the past assume a single objective that does not consider the goals and constraints of a firm. The role of the decision maker, along with his or priorities, has been ignored, allowing erroneous and irrational results to taint the complex decision-making process.

EVALUATION OF MATHEMATICAL PROGRAMMING TECHNIQUES

The capital structure theories and models of evaluation have assumed certainty regarding cash flow, capitalisation rates, time periods, flotation costs, the price of the firm, and other influencing variables. All evaluation models have used the deterministic value approaches in forecasting the future. The mathematical techniques that ...