A Dynamic Theory of the Firm: Production, Finance and by Paul van Loon

By Paul van Loon

This quantity is the ultimate results of the study undertaking ''Micro development model", that used to be backed via the relevant learn Pool of Tilburg college, the Netherlands. except the college Council for this crucial monetary aid, I owe Prof. Dr. Fiet Verheyen a great deal for how within which he brought me into medical circles and for how during which he supervised and inspired my paintings. Dr. Jan de Jong and Peter Janssen C. E. , Technical collage of Eindhoven, piloted me competently throughout the mathe­ matics of optimum regulate conception and got rid of a few technical obstacles. Their support was once fundamental for the luck of this undertaking. i might additionally prefer to point out the type help of Prof. Dr. Jack Kleijnen, who gave me many beneficial tricks on the way to current the result of this venture. during this means i used to be in a position to touch with numerous resear­ chers inside and out the Netherlands. such a lot thankful i'm to Prof. Dr. Charles Tapiero, Jerusalem collage, who commented on very important components of this ebook in a positive means and who prompt many topics for additional examine. additionally Mr. Geert­ Jan vsn Schijndel, Tilburg collage, can be pointed out the following, simply because he heavily learn the paintings and that i preferred his comments and corrections greatly. Many collea­ gues have contributed to the result of this learn venture in an instantaneous or oblique manner. specially I should still wish to point out my contacts with Prof. Dr.

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The first trajectory gives information about growth- and stationary stages and forces us at once to analyse the stationary state condition for the most complex case. We will further discuss the mesning of conditions on the initisl vslues of equity and capital goods. The second trajectory deals with depth investments: the switch from labour-intensive to capital-intensive production. The third trajectory describes the process of a firm starting with maximum debt financing and ending as a self-financing producer.

3. Production and finance I (Leland). Leland assumes a managerial firm, maximizing total discounted sales over a finite planning horizon plus the final amount of equity. As equity is supposed to be the value of the stock of capital goods reduced by the amount of debt money, Leland formulates the following goal function: maximize L, B JZ e-i'T o p Q(K,L) dT + e -i'z S(K(z) - Y(Z» (8) 27 in which (9) Y = B(T) BCT) inflow of debt yeT) total amount of debt Q() production function SC) weighting function of net terminal assets l' time preference rate of the managers.

Due to the cheapness of equity compared to debt, pure self-financing is the cheapest way of financing the capital rsr stock. On the level * these financing costs equal marginal net revenue on capital' goods and so the relevant level yields the maximum profit flow. 2. are con- cerned. 4. 4 that it appears to be profitable to start growing with maximum debt financing. ). We will describe this more precisely in section 4 of chapter 5 with the help of our own model. * on which marginal net revenue As soon as the capital stock reaches the level RYx' equals the interest rate on debt money, it is no longer profitable to extend the amount of debt and the firm wants to get rid of it.

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