Report About Dynamic Investments, Capital Structure, And Debt Overhang

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Report about Dynamic Investments, Capital Structure, and Debt Overhang Department of Finance National Enterprises Limited Yuqi Gu 23/05/2016 Executive Summary This report mainly discussed findings, methodology, and points from the paper: Sundaresan, Wang and Yang, 2015, “Dynamic Investment, Capital Structure, and Debt Overhang”. The model in this paper showed that firm’s growth-option exercising decisions and leverage policies are related to financing and anticipated endogenous default decisions. The paper also showed the framework for evaluating the influence on investment and financing decisions from the life cycle of the firm. Finally, debt seniority and debt priority structures were important to make leverage decisions and growth-option exercising. Introduction The paper of Sundaresan, Wang and Yang (2015), “Dynamic Investment, Capital Structure, and Debt Overhang”, focused on build a dynamic financing framework model based on previous articles. In the paper of Myers (1977), growth options and assets in place were considered as the two factors which combined to the firm. During the growth of a firm, multiple rounds of investments and financing may be involved in the growth stage. Models of investments and dynamic financing in previous literatures did not considered the two factors together. Therefore, many problems still need to be interpreted in investment theory with dynamic financing. This is part of the reason why the authors tried to model the factors

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