Abstract This article sets up a single period value maximisation model for the frm based on stochastic end-of-period cash infows, stochastic bankruptcy costs and taxes based on income rather than wealth. The risk- return tradeoff is captured in the Capital Asset Pricing Model.Thus, the model also assumes a perfect capital market and market equilibrium. The model establishes the existence of a unique optimal fnancial leverage at which the frm value is maximised, this leverage being less than the maximum debt capacity of the frm. Keywords: Firm Value, Debt Capacity, Capital Structure, Financial Leverage, Capital Markets JEL Classifcation: G34, M41 A Single Period Stochastic Model for Maximising Firm’s Value J. P. Singh* Introducton The policies and procedures of corporate management have undergone a complete metamorphosis in the preceding three decades. As the market effciencies have approached perfection and trade boundaries have been belittled by technology, the world has dwindled to a shopping plaza. Competition has become unprecedentedly intense. Amidst all this, opportunities for investment have increased manifold. Corporates are taking recourse to innovative business strategies to facilitate cost reductions, competitiveness, and sustenance. The race is to deliver value to the investor. Thus, enhancing frm value has become a cardinal strategic objective for all market participants. The association between fnancial leverage and frm value has been much explored. The traditional viewpoint believes that the value of a frm is a concave function of the proportion of debt employed in its capital structure, * Professor, Department of Management Studies, IIT Roorkee, Uttarakhand, India. Email: jpsiitr@gmail.com so that there exists a unique optimal level of fnancial leverage corresponding to which the frm’s value attains a maximum. This position was radically challenged by Miller and Modigliani (MM hereinafter) in their celebrated leverage irrelevance propositions wherein they established through arbitrage arguments that the value of a frm was independent of its capital structure. However, MM made certain drastic assumptions in arriving at their conclusions viz. (i) substitutability of corporate debt by personal debt; (ii) absence of differentials between corporate and personal taxes (Modigliani & Miller, 1958, 1963, 1969). In the absence of empirical support, Miller later, conceded that although the leverage irrelevance did hold in steady state equilibrium, it was during the transient dynamic adjustment towards this point of equilibrium that a frm may achieve a value maximum (Miller, 1977). It was later established, while allowing for more realistic assumptions including bankruptcy and agency costs, non- debt corporate tax shields, depreciation and investment tax credits in addition to the conventional debt related tax offsets that a unique leverage for frm maximum did exist (DeAngelo & Masulis, 1980). A stochastic dynamic programming model for the determination of the optimal capital structure with a state preference setup for capturing the risk-return tradeoff, and the existence of bankruptcy costs has been attempted (Kraus & Litzenberger, 1973). One can also conclude the existence of an optimal leverage for the frm on the basis of market imperfections (Scott, 1976). Numerous attempts to optimise the capital structure based on varying premises, other than the above, have been reported as well (Scott, 1972; Myers, 1977; Brennan & Schwartz, 1978: Holland & Myers, 1980: Myers & Majluf, 1984; Hochman & Palmon, 1985). The relationships between the various determinants of frm value have also been thoroughly explored in