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

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  • Xiaodong Xu
  • John R. Birge

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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  • Xiaodong Xu & John R. Birge, 2006. "Equity valuation, production, and financial planning: A stochastic programming approach," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(7), pages 641-655, October.
    • Handle: RePEc:wly:navres:v:53:y:2006:i:7:p:641-655
    DOI: 10.1002/nav.20182
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    2. Yasin Alan & Vishal Gaur, 2018. "Operational Investment and Capital Structure Under Asset-Based Lending," Manufacturing & Service Operations Management, INFORMS, vol. 20(4), pages 637-654, October.
    3. Kajjoune, Oussama & Aouam, Tarik & Zouadi, Tarik & Dairi, Meriem, 2021. "Dynamic lot-sizing with short-term financing and external deposits for a capital-constrained manufacturer," International Journal of Production Economics, Elsevier, vol. 242(C).
    4. Shi, Jinzhao & Guo, Ju'e & Du, Qiang & Lin, Feng & Lai, Kin Keung & Cheng, T.C.E., 2020. "Optimal financing mode selection for a capital-constrained retailer under an implicit bankruptcy cost," International Journal of Production Economics, Elsevier, vol. 228(C).
    5. John R. Birge, 2015. "OM Forum—Operations and Finance Interactions," Manufacturing & Service Operations Management, INFORMS, vol. 17(1), pages 4-15, February.
    6. Karthik V. Natarajan & Jayashankar M. Swaminathan, 2014. "Inventory Management in Humanitarian Operations: Impact of Amount, Schedule, and Uncertainty in Funding," Manufacturing & Service Operations Management, INFORMS, vol. 16(4), pages 595-603, October.
    7. Lode Li & Martin Shubik & Matthew J. Sobel, 2013. "Control of Dividends, Capital Subscriptions, and Physical Inventories," Management Science, INFORMS, vol. 59(5), pages 1107-1124, May.
    8. Iny Hwang & Taejin Jung & Woo‐Jong Lee & Daniel G. Yang, 2021. "Asymmetric Inventory Management and the Direction of Sales Changes†," Contemporary Accounting Research, John Wiley & Sons, vol. 38(1), pages 676-706, March.
    9. Ahmet Akca & Ethem Çanakoğlu, 2021. "Adaptive stochastic risk estimation of firm operating profit," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(3), pages 463-504, September.
    10. Khan, Safi Ullah, 2022. "Financing constraints and firm-level responses to the COVID-19 pandemic: International evidence," Research in International Business and Finance, Elsevier, vol. 59(C).
    11. Xiting Gong & Xiuli Chao & David Simchi‐Levi, 2014. "Dynamic inventory control with limited capital and short‐term financing," Naval Research Logistics (NRL), John Wiley & Sons, vol. 61(3), pages 184-201, April.
    12. Qin, Juanjuan & Fu, Huiping & Wang, Ziping & Xia, Liangjie, 2021. "Financing and carbon emission reduction strategies of capital-constrained manufacturers in E-commerce supply chains," International Journal of Production Economics, Elsevier, vol. 241(C).
    13. Fehmi Tanrisever & Nitin Joglekar & Sinan Erzurumlu & Moren Lévesque, 2021. "Managing Capital Market Frictions via Cost-Reduction Investments," Manufacturing & Service Operations Management, INFORMS, vol. 23(1), pages 88-105, 1-2.
    14. Xiaoyan Qian & Tava Lennon Olsen, 2020. "Operational and Financial Decisions Within Proportional Investment Cooperatives," Manufacturing & Service Operations Management, INFORMS, vol. 22(3), pages 545-561, May.
    15. Jain, Richa & Reindorp, Matthew & Chockalingam, Arun, 2023. "Buyer-backed purchase-order financing for SME supplier with uncertain yield," European Journal of Operational Research, Elsevier, vol. 307(2), pages 758-772.
    16. Babich, Volodymyr & Birge, John, 2021. "The Interface of Finance, Operations, and Risk Management," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 15(1-2), pages 1-203, June.
    17. Chen, Zhen & Archibald, Thomas W., 2024. "Maximizing the survival probability in a cash flow inventory problem with a joint service level constraint," International Journal of Production Economics, Elsevier, vol. 270(C).

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