Journal of Mathematical Finance

Volume 3, Issue 3 (October 2013)

ISSN Print: 2162-2434   ISSN Online: 2162-2442

Google-based Impact Factor: 1.03  Citations  h5-index & Ranking

Valuation and Financing of Cash Cows and Growth Firms

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DOI: 10.4236/jmf.2013.33A001    3,749 Downloads   5,956 Views  Citations

ABSTRACT

This paper develops separate trade-off models for the valuation and financing of non-growth firms (cash cows) and growth firms that incorporate tax benefits, bankruptcy costs, and relevant agency costs. Cash cows generally have relatively high leverage, though firm value, leverage, and profitability are all affected by variations in the efficacy of both internal and external governance mechanisms to mitigate agency costs of managerial discretion. For growth firms, where agency costs of debt are relevant, we find that: 1) optimal leverage is generally relatively low; 2) the relationship between optimal leverage and Tobin’s Q is negative and highly convex; and 3) optimal leverage increases with initial profitability. Our analysis helps to explain anomalous results documented in previous empirical tests of trade-off theory, specifically, relationships between leverage and both the market-to-book assets ratio and profitability.

Share and Cite:

J. Ogden and S. Wu, "Valuation and Financing of Cash Cows and Growth Firms," Journal of Mathematical Finance, Vol. 3 No. 3A, 2013, pp. 1-8. doi: 10.4236/jmf.2013.33A001.

Cited by

[1] Corporate Cash Balance, Volatility, and Adjustment: Growth Firms vs. Cash Cows
Journal of Accounting and Finance, 2017

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