Investigation of Iterative Algorithms For Evaluation of Capital Structure and Cost

Vigen Minasyan

Vigen Minasyan Investment Decisions and Valuation Chair Russian Presidential Academy of National Economy and Public Administration

Keywords: company’s value, structure of capital, free cash flow, iterative method, principle of contracting mappings, fixed point of mapping, duration of cash flows, convergence of recurrent process

Abstract

Determination of structure and correct calculation of a company’s capital value is an essential; theoretical and practical problem for corporate finance. The proportion between the company’s equity and borrowed capital determines the risk and profitability of the company and, consequently, the welfare of its owners. The most common recommendation is to evaluate the stricture of capital based on market proportions between indebtedness and equity. However, market proportions most often deviate from values obtained through analytical calculations. This means that weak efficiency of the market brings about inconsistency between the input data and the results, which are calculated from them. Second, not all companies have a representative market quotation. There is a question, then: how can we correctly evaluate capital and its market structure for individual projects and companies in general? The work presented below is dedicated to the iterative method for evaluation of fair structure of capital as suggested in (Limitovsky M.A., Minasyan V.B. 2010), and to the proving of consistency of this method for a very large number of companies.