Abstract
Merton’s structural model offers a powerful and intuitively appealing approach to the evaluation of a firm’s capital structure choices and market behaviour across a firm’s issued debt and equity securities. We construct a robust, extended and expanded interpretation of the Merton conceptual framework that incorporates many real world features of firm behaviour and market activity. Notably, we introduce the notion of liquidity that captures the requirement for firms to settle all payments and receipts through a cash account.
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