Advertisement

Corporate Financial Modeling Using Quantitative Methods

  • Panagiotis M. SpanosEmail author
  • Christos L. Galanos
  • Konstantinos J. Liapis
Conference paper
Part of the Springer Proceedings in Business and Economics book series (SPBE)

Abstract

The purpose of this research is the application of quantitative methods in corporate financial modeling under uncertainty conditions. Most firms forecast their capital requirements by constructing pro forma financial statements. Pro forma financial statements are the base for using the additional funds needed (AFN) methodology to estimate capital requirements in a deterministic perspective. The question is if AFN methodology can also be employed in volatile financial data conditions, in order to enhance policy-making. By using Monte Carlo simulation and mathematical programming, it was found that the AFN formula is an appropriate methodology to calculate the capital requirements under uncertainty and thus apply any optimization techniques. The expected financial elements usually depend on various factors, so a quantitative range is more useful in financial planning. The importance of this research is that capital requirements forecasting can be used as an envelope of scenarios that can support financial planning and decision-making. Moreover, financial modeling becomes a useful tool in the restructuring planning processes for estimating base, adverse, and best business scenarios.

Keywords

AFN Financial modeling Capital requirements Monte Carlo simulation Optimization 

References

  1. Bennett, J., & Ormerod, R. N. (1984). Simulation applied to construction projects. Construction Management and Economics, 2(3), 225–263.CrossRefGoogle Scholar
  2. Brigham, E. F., & Daves, P. R. (2007). Intermediate financial management (9th ed.). Mason, OH: Thomson.Google Scholar
  3. Damodaran, A. (2007). Return on capital (ROC), return on invested capital (ROIC) and return on equity (ROE): Measurement and implications.  https://doi.org/10.2139/ssrn.1105499
  4. Gordon, M. J. (1962). The investment, financing, and valuation of the corporation. Homewood, IL: RD Irwin.Google Scholar
  5. Hertz, D. B. (1964). Risk analysis in capital investment. Harvard Business Review, 42(1), 95–106 (Reprinted in Harvard Business Review, September/October 1979, pp. 169–182).Google Scholar
  6. Knight, J. A. (1997). Value based management: Developing a systematic approach to creating shareholder value. New York: McGraw-Hill.Google Scholar
  7. Kwak, W., Shi, Y., Lee, H., & Lee, C. F. (1996). Capital budgeting with multiple criteria and multiple decision makers. Review of Quantitative Finance and Accounting, 7(1), 97–112.CrossRefGoogle Scholar
  8. Loizou, P., & French, N. (2012). Risk and uncertainty in development: A critical evaluation of using the Monte Carlo simulation method as a decision tool in real estate development projects. Journal of Property Investment & Finance, 30(2), 198–210.CrossRefGoogle Scholar
  9. Lorance, R. B., & Wendling, R. V. (1999). Basic techniques for analyzing and presenting cost risk analysis. AACE International Transactions, K11.Google Scholar
  10. Luoma, M., & Ruuhela, R. (2001). How to develop price per earnings ratio to fair valuation method of a stock? Technical Analysis of Stock and Commodities, 19, 34–38.Google Scholar
  11. Luoma, M., Sahlström, P., & Ruuhela, R. (2006). An alternative estimation method of the equity risk premium using financial statements and market data. Advances in Accounting, 22, 229–238.CrossRefGoogle Scholar
  12. O’Byrne, S. F. (1999). EVA and its critics. Journal of Applied Corporate Finance, 12(2), 92–96.CrossRefGoogle Scholar
  13. Peters, D. J. (1991). Valuing a growth stock. The Journal of Portfolio Management, 17(3), 49–51.CrossRefGoogle Scholar
  14. Sizer, J. (1988). An insight into management accounting. Leicestershire: Penguin Business.Google Scholar
  15. Thalassinos, E., Kyriazidis, T., & Thalassinos, E. (2006). The Greek capital market: Caught in between poor corporate governance and market inefficiency. European Research Studies Journal, 9(1–2), 3–24.Google Scholar
  16. Vose, D. (1996). Quantitative risk analysis: a guide to Monte Carlo simulation modelling. Chichester: Wiley.Google Scholar
  17. Winkler, D. (1994). Financing costs of additional funds needed: A modified equation approach. Financial Practice and Education, 4(1), 149–154.Google Scholar
  18. Winston, W. L. (2004). Operations research: Applications and algorithms (4th ed.). Pacific Grove, CA: Cengage Learning Higher Education.Google Scholar
  19. Wright, D. (1996). Management accounting. New York: Addison Wesley Longman.Google Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  • Panagiotis M. Spanos
    • 1
    Email author
  • Christos L. Galanos
    • 1
  • Konstantinos J. Liapis
    • 1
  1. 1.Faculty of Sciences of Economy and Public Administration, Department of Economic and Regional DevelopmentPanteion University of Social and Political SciencesAthensGreece

Personalised recommendations