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Firm plan model – Key elements
Input: Decision variables Sales volume Production volume New debt etc.
Input: Given parameters Sales price/unit Production cost/unit Amortization ratio etc.
Input: Logical restrictions Inventory ≥ 0 Fixed assets ≥ 0 Debt ≥ 0 etc.
Computations/Output: Multi-period financial statements Balance sheet Statement of income Some elements of Cash flow statement
Output: Firm valuation:Sum of discounted future Net Income
Input: Historical accounts Balance sheet
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Firm valuation - Work schedule1. Build a model for multi-period financial statements for
the given case– Include the basic accounting logic– Link to the historical accounts– Link to the input elements (Decision variables, parameters)– Begin with the status quo i.e. no transactions– Check that the balance sheet is in balance– Add one decision/transaction at a time, link in all its effects and
check the consistency of the balance sheet before continuing– Compute the company value as a sum of discounted net income
over the planning period
2. Select a company to evaluate– Enter the historical accounts– Enter the parameters corresponding to the selected company– Fill in the decision variables according to your judgment as a
company valuator– Compute the company value
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Large Scale Techno-Economic Firm Planning
Key elements
Optimal Firm Planning
Dynamic Firm Models(Monetary Process)
Real ProcessForecastingNeural Nets
Nonlinear Models
OptimizationFuzzy Sets
Genetic Algorithms
ComputationPC-applications (interface)
High Performance CPU (CSC)
Parallel Processing (1) MIMD / SUPER machines (2) Joint research CSC - support:
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Key Features:
• The necessary financial relations included
• Free specification of planning horizon
• Simulation and optimization combined
• Guaranteed feasibility
• A flexible optimization module written as a dynamic link libary (DLL) in strict ANSI C.
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Strategic Firm Planning ModelStrategic Firm Planning Model
• Financial decision variables
• Constraints on decision variables
• Fundamental financial constraints
• Balance sheet relationships
• Goal functions
• Multi-period optimization problem - solving in LINGO
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Decision variables
• Sales volume (SALEVOL)
• Production volume (PRODVOL)
• New debt (NEWDEBT)
• Repayment (REPAY)
• Investments (INV)
• New issues (NEWISSUE)
• Dividends (DIV)
• Depreciation (DEP)
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Deviation variables
• Min dividend deviation (DIVDIFF)
• Max dividend deviation (MAXDIVDIFF)
• Equity deviation (EQUITYDIFF)
• Debt/Equity deviation (DEDIFF)
• Repayment deviation (REPDIFF)
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FinancialFinancial statementstatement
• Fixed assets
• Value items
• Inventory
• Sales receivable
• Cash
• Other financial items
• Shareholders´equity
• Other restricted equity
• Net income of the year
• Other unrestricted equity
• Value items
• Accumulated depreciation difference
• Reservations
• Current liabilities
• Long-term debt
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Statement of incomeStatement of income+ Turnover- Operating costs - Changes in inventory- Depreciation- Interest expenses+ Other financial income+ Extraordinary income and expenses+ Allocations- Taxes= Net income
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Constraints on decision variablesConstraints on decision variablesConstraints on decision variablesConstraints on decision variables
1. Turnover - upper bound = f(production capacity)
TurnO Capacity TurnO FIXASSETFactor P prog
Machineprice progt t tt
* _
_
FIXED ASSETS
Factor * FIXASSETS
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Factor * FIXASSETS
UNIT
PRICESALES
UNITCOSTMACHINE
FIXASSETSFactor
VOLUMEPRODUCTIONOFVALUESALES
capacityoductionUNIT
COSTMACHINECOSTPURCHASEMACHINE
*
Pr*
1. Turnover - upper bound (cont.)
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Constraints on decision variablesConstraints on decision variables
2. Repayment level
MINIMIZE
h
1h
1tt
h
1tt0hhh REPAYDIFFREPAYNEWDEBTDEBTrepREPAYDEBT*repREPAY
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Constraints on decision variablesConstraints on decision variablesConstraints on decision variablesConstraints on decision variables
3. New issues - upper bound
MINIMIZE
tt EQUITYDIFFEQUITYnNEWISSUE 0*
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Constraints on decision variablesConstraints on decision variables
4. Dividends
MINIMIZE
h
h
tt
h
tth
hh
MAXDIVDIFFDIVNETINCOMET.EQUITYFREE.UNRESDIV
TR.EQUITYFREE.UNRESDIVUpperbound
1
110
h
h
tth
hh
MINDIVDIFFNEWISSUEEQUITYdivDIV
div*EQUITYDIV:Lowerbound
10
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Constraints on decision variablesConstraints on decision variables
5. Depreciation - lower bound
h
t
h
ttt
hhh
DEPINVFIXASSETdep
DEPFIXASSETdepDEP
1
1
10
*
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Fundamental Financial Fundamental Financial Constraints Constraints
Fundamental Financial Fundamental Financial Constraints Constraints
1. Cash - nonnegative
Cash flow:+ Turnover - Change in sales revenues- Costs - Change in other financial assets- Interest expenses + Change in current liabilities+ Other financial income + New debt+ Extraordinary income - Repayment- Dividends - Investments
h
tth CashCashCash
00 00
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Fundamental Financial Fundamental Financial Constraints Constraints
Fundamental Financial Fundamental Financial Constraints Constraints
2. Fixed assets- nonnegative
001
0
h
ttth DEPINVFIXASSETSFIXASSETS
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Fundamental Financial Fundamental Financial Constraints Constraints
Fundamental Financial Fundamental Financial Constraints Constraints
3. Long-term debt- nonnegative
001
0
h
ttth REPAYNEWDEBTDEBTDEBT
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Fundamental Financial Fundamental Financial Constraints Constraints
Fundamental Financial Fundamental Financial Constraints Constraints
4. Capital structure
MINIMIZE
hh
h
tttt
hh
DEDIFFLIABdeDIVNETINCOMENEWISSUE
EQUITYLIABdeEQUITY
*
*
1
0
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Financial relationships
Costs: c * TurnOInterests: i * DEBTOt. fin. costs. o *
OTH.FIN.ASS.Sales receivable s * TurnOCurrent liabilities cl * Costs
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Alternative Objective functions Alternative Objective functions Alternative Objective functions Alternative Objective functions
- Optimize discounted dividend
- Optimize discounted net income
Max w
DIV
rDIFFt
tt
h
1
1
Max w
NETINCOME
rDIFFt
tt
h
1
1
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Example: optimization in LINGOThe optimization module of the firm planning system is written as a dynamic link
library (DLL) in strict ANSI C by the author. However, in smaller optimization formulations like the one in analys.xls, the optimization can be carried out by Excel. We illustrate the solution process by a small system written for LINGO:
13] ! Objectivefunction 3 ;14] MAX = +.8696*Div(1)-10000.*MinDivdiff(1)-10000.*EQUITYdiff(1)-10000.*DEdiff(1)15] -10000.*REPdiffm(1)-30000.*MAXdivdf(1);16] !AMATRIX * X < b-vector;17] !Cash;18] +3.135*Oms(1)+.91*Nylan(1)-.91*Amort(1)-1.*Inv(1)19] +1.*Emiss(1)-1.*Div(1)+.1*Avskr(1)>3137.551;20] !Turnover;21] +1.*Oms(1)-.5*Inv(1)+.5*Avskr(1)<2950.4;22] !Fixed assets;23] +1.*Inv(1)-1.*Avskr(1)>-5900.8;24] !Long-term debt;25] +1.*Nylan(1)-1.*Amort(1)>-2353.9;26] !Minimal depreciation;27] -.03*Inv(1)+1.*Avskr(1)>177.024;28] !Debt-Equity ratio;
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29] -2.375*Oms(1)-1.09*Nylan(1)+1.09*Amort(1)+1.*Emiss(1)30] -1.*Div(1)-.9*Avskr(1)+1.*DEdiff(1)>-3012.849;31] !New Issues;32] +1.*Emiss(1)-1.*EQUITYdiff(1)<111.572;33] !Minimal Dividend;34] -.01*Emiss(1)+1.*Div(1)+1.*MinDivdiff(1)>13.777;35] !Maximal Dividend;36] -.45*Oms(1)+.09*Nylan(1)-.09*Amort(1)+1.*Div(1)37] +.9*Avskr(1)-1.*MAXdivdf(1)<1450.449;38] !Minimal Debt Repayments;39] -.15*Nylan(1)+1.*Amort(1)+1.*REPdiffm(1)=353.085;
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Related ResearchRelated ResearchRelated ResearchRelated Research
Östermark R: "Pitkän tähtäyksen strateginen tilinpäätössunnittelumalli" (A long term strategic planning model). Presented at European IFPS User's Group Meeting, Amsterdam 1983. In: European IFPS User's Group Proceedings, 11, 1983, 14 p.
Östermark, R. and E. Kasanen: "A graphical decision support system for multi-objective financial modeling", Turku School of Economics, 1985. Presented at the EURO VII Conference in Lisbon, Portugal 09/1986.
Östermark, R.: "A graphical DSS for conflict zone analysis of commercial bank environment", In: DSS Transactions 1987, 15 p. Presented at the DSS-87 Conference in San Fransisco, California.
Östermark, R.: "Optimal compromising within a multi-criterial conflict zone", European Journal of Operational Research 35, 1988, pp. 255-262.
Östermark, R. and K. Söderlund: "A multi-period firm model for strategic decision support", Kybernetes 28:5, 1999, pp. 538-556.
Östermark, R., H. Skrifvars, and T. Westerlund: "A nonlinear mixed integer multi-period firm model", International Journal of Production Economics 67, 2000, pp. 183-199.
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Related Research…Related Research…Related Research…Related Research…
Booth, Bessler, Foote.”Managing interest-rate risk in banking institutions” European Journal of Operational Research 41(1989) 302-313.
Reid, Bradford.”A Farm Firm Model of Machinery Investment Decisions” American Journal of Agricultural Economics (1987) 64-77.
Bessler, Booth. “An interest rate risk management model for commercial banks” European Journal of Operational Research 74 (1994) 243-256
Korhonen’s Bank Model [EJOR, around 1989]
The derivative firm model (Choi et al, Man. and Decision Economics [1993])