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Equity valuation, production, and financial planning: A stochastic programming approach
Author(s) -
Xu Xiaodong,
Birge John R.
Publication year - 2006
Publication title -
naval research logistics (nrl)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.665
H-Index - 68
eISSN - 1520-6750
pISSN - 0894-069X
DOI - 10.1002/nav.20182
Subject(s) - valuation (finance) , dividend , capital budgeting , equity (law) , economics , corporate finance , production (economics) , computer science , microeconomics , finance , actuarial science , operations research , mathematics , project appraisal , political science , law
Abstract Most of the operations management literature assumes that a firm can always finance production decisions at an optimal level or borrow at a constant interest rate; however, operational decisions are constrained by limited capital and often critically depend on external financing. This paper proposes an integrated corporate planning model, which extends the forecasting‐based discount dividend pricing method into an optimization‐based valuation framework to make production and financial decisions simultaneously for a firm facing marker uncertainty. We also develop an efficient algorithm to solve the resulting integer stochastic programming model with nonlinear constraints. Compared with traditional valuation and planning models, our method yields higher equity valuations, indicating that valuation without considering contingent decisions is inherently inaccurate. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006