Equity Valuation, Production, and Financial Planning: A Stochastic Programming Approach
Northwestern University - Department of Industrial Engineering and Management Sciences
John R. Birge
University of Chicago - Booth School of Business
Most of the operations management literature assumes that the 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 market uncertainty. We also develop an efficient algorithm to solve the integer stochastic programming model with nonlinear constraints. Compared with the traditional valuation and planning models, our method yields higher equity valuations, indicating that valuation without considering contingent decisions is inherently inaccurate.
Number of Pages in PDF File: 36
Keywords: Production planning, financial planning, stochastic programming, debt pricing, capital
JEL Classification: C61, D24, G31, G32
Date posted: January 23, 2005
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