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Equity valuation, production, and financial planning: A stochastic programming approach

  1. Xiaodong Xu1,*,
  2. John R. Birge2,*

Article first published online: 7 AUG 2006

DOI: 10.1002/nav.20182

Issue

Naval Research Logistics (NRL)

Naval Research Logistics (NRL)

Special Issue: Special Issue on Applications of Financial Engineering in Operations, Production, Services, Logistics, and Management

Volume 53, Issue 7, pages 641–655, October 2006

Additional Information

How to Cite

Xu, X. and Birge, J. R. (2006), Equity valuation, production, and financial planning: A stochastic programming approach. Naval Research Logistics, 53: 641–655. doi: 10.1002/nav.20182

Author Information

  1. 1

    Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208

  2. 2

    University of Chicago Graduate School of Business, Chicago, Illinois 60637

*Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208

Publication History

  1. Issue published online: 29 AUG 2006
  2. Article first published online: 7 AUG 2006
  3. Manuscript Accepted: 13 DEC 2005
  4. Manuscript Revised: 26 OCT 2005
  5. Manuscript Received: 8 OCT 2004

Funded by

  • National Science Foundation. Grant Number: DMI-0100462
  • University of Chicago Graduate School of Business

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Keywords:

  • production planning;
  • financial planning;
  • stochastic programming;
  • debt pricing;
  • capital structure

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

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