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An Application of the Decomposition Principle to Financial Decision Models

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  • Morris, James R.

Abstract

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.

Suggested Citation

  • Morris, James R., 1975. "An Application of the Decomposition Principle to Financial Decision Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 10(1), pages 37-65, March.
    • Handle: RePEc:cup:jfinqa:v:10:y:1975:i:01:p:37-65_01
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