Author(s)

Xie Xiang-tian

Corresponding Author

Xie Xiang-tian

Abstract

This paper proposed an equity financing investment model and a debt financing investment model based on real options theory, with considering price-sensitive demand and price obeying the Geometric Brownian Motion. We derived the optimal solutions, which show that the optimal bankruptcy threshold of debt financing is higher than equity financing, the optimal bankruptcy threshold and the optimal investment threshold decrease as the market capacity increases, and increase as the price-sensitive coefficient increases.

Keywords

Real options, Investment under uncertainty, Equity financing, Debt financing, Price-sensitive demand