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An Application of the Decomposition Principle to Financial Decision Models

Published online by Cambridge University Press:  19 October 2009

James R. Morris
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Linear programming models of specialized financial decision problems such as working capital management [21], short-term financing [22], or capital bug-geting [24] are deficient in that they may lead to decisions which are suboptimal with respect to the firm as a whole. Each model attacks a single decision problem and neglects its interaction with the other activities of the firm. On the other hand, a model which reflects these interdependences and interactions by including the various financing, investment, and operating decisions in a single model tends to become excessively large and inefficient to use. What is needed is a model that incorporates the efficiencies inherent in smaller, more specialized models which can be utilized on a decentralized basis and which can simultaneously lead to decisions that are optimal for the firm as a whole.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 10 , Issue 1 , March 1975 , pp. 37 - 65
Copyright
Copyright © School of Business Administration, University of Washington 1975

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References

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