Searching for a Financial Plan: A MOLP Multiple Reference Point Approach

Abstract

This paper presents a financial planning model and a multiple reference point approach (MRPA) to deal with it.

The model is formalised with a multiobjective linear programming (MOLP) approach considering a set of capital investment projects and a series of financing decisions over a planning period. Broadly speaking the financial decisions try to achieve a certain debtequity ratio considering a firm’s market value and the risk of financial distress. The key problem approached is the interaction of the financing and investment choices.

The MRPA enables oriented search for non-dominated solutions of a MOLP. Conceptually it is based on the quasi-satisfying rational framework for decision developed by Lewandovski and Wierzbicki [7]. It supports the decision maker (DM) learning about the non-dominated region to help him in the process of becoming aware of his aspirations and of their attainability. Based on the projection of the objective function gradients onto the non-dominated region the MRPA allows for the location of the reference points and their projections to travel in well defined and controlled directions, as well as the number of the reference points to change according to the exploratory needs of the DM.

Some tests carried out with the financial model are presented focusing the features that enable the choice of the search direction in a flexible and completely controlled (by the DM) manner. From the reported experiments the MRPA appears as being a useful approach to financial planning processes.