Enrique Arzac

Structural Planning Under Controllable Business Risk

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Abstract:
In his fundamental works and Douglas Vickers integrates the production, investment and financing decisions of the firm into a useful and illuminating model. He deals with uncertainty using risk-adjusted capitalization and interest rates, assumes constant business risk and treats financial risk as a function of leverage. This paper extends Vickers' analysis by allowing business risk to depend on production and investment decisions. In particular, it derives a criterion for investment decisions under general uncertainty and market organization conditions when business risk is subject to control. In his fundamental works and Douglas Vickers integrates the production, investment and financing decisions of the firm into a useful and illuminating model. He deals with uncertainty using risk-adjusted capitalization and interest rates, assumes constant business risk and treats financial risk as a function of leverage. This paper extends Vickers' analysis by allowing business risk to depend on production and investment decisions. In particular, it derives a criterion for investment decisions under general uncertainty and market organization conditions when business risk is subject to control.

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