Abstract: Stochastic Demand and the Equity Capitalization Rate

Abstract

The purpose of our paper is to examine the impact of output and asset decisions on the pure equity capitalization rate of a monopolistic firm which faces a stochastic demand curve. Within the confines of a specific set of constraints we derive the following conclusions:1) when assets are fixed and the task of the firm is to find the shareholder wealth-maximizing output, the capitalization rate is functionally related to the level of output, when Leland's Principle of Increasing Uncertainty (PIU) holds the optimal output will occur when the capitalization rate is increasing.