The purposes of this thesis are to investigate a firm's optimal capital structure in consideration of its characteristics and environment in Korea, second, to investigate its optimal financial policy which will minimize the adjustment costs and the loss from the persistence of target deviation.
All companies are divided into two groups. One is financially healthy company group which is healthy in capital structure, profitability, growth, and return on share. The other is financially unhealthy company group. The methodology used in this thesis is to find the relationships between a firm's capital structure and its operating characteristics of healthy companies. The characteristics include firm size, asset composition, growth, return on share, liquidity, and profitability. Then, on the basis of the estimated relationships, this study attempts to find the optimal capital structure of unhealthy company group.
In the absense of any constraints or adjustment costs, the firm will perfectly and instantaneously adjust its Equity-Debt ratio to the target, whenever a deviation occurs. However, given the costs involved in adjusting the Equity-Debt ratio, the management should determine an optimal multi-period adjustment policy, which will minimize the total long-run costs. And it is possible to find that the optimal control variables-dividend, stock, long-term debt, and short-term debt, are linear function of the most recently observed values of the equity and debt states by the optimal control theory.
The result of this thesis can be summarized as follows:
1) It provides on evidence that companies appear to make their choice of financing instrument as if they have target Equity-Debt ratio in mind.
2) It demonstrates that companies are heavily influenced by asset composition, firm size, growth, and profitability in choosing between debt and equity.
3) The result are consistant with the notion that the optimal control variables are linear function of the most recently observed values of the equity and debt states.
