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Equity Valuation, Production, and Financial Planning: A Stochastic Programming Approach

36 Pages Posted: 23 Jan 2005  

Xiaodong Xu

Northwestern University - Department of Industrial Engineering and Management Sciences

John R. Birge

University of Chicago - Booth School of Business

Date Written: October 2004

Abstract

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.

Keywords: Production planning, financial planning, stochastic programming, debt pricing, capital

JEL Classification: C61, D24, G31, G32

Suggested Citation

Xu, Xiaodong and Birge, John R., Equity Valuation, Production, and Financial Planning: A Stochastic Programming Approach (October 2004). Available at SSRN: https://ssrn.com/abstract=652565 or http://dx.doi.org/10.2139/ssrn.652565

Xiaodong Xu

Northwestern University - Department of Industrial Engineering and Management Sciences ( email )

Evanston, IL 60208-3119
United States

John R. Birge (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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