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

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 ∗This work was supported in part by the National Science Foundation under Grant DMI-0100462.