This thesis deals with strategic financial planning using the method of simulation and simultaneous equations system at business unit level. Generally, strategic financial planning should (1) involve the key variables in corporate growth process, (2) reflect the dynamic interaction in the system, and (3) incorporate the dimension of uncertainty.
The framework of this thesis consists of two models; Model I and Model II.
Model I, based on Warren-Shelton's simultaneous equations system model, is aimed at reflecting the interrelationships among various financial variables, and Model II, based on Gentry's simulation model, has a purpose to consider the uncertainty by the method of simulation, which is originally suggested by Hertz.
Model I and Model II are integrated by five intermediate variables (EPS, growth rate of investment, debt ratio, interest rate of debt, and cost of equity) which are the main focus of financial decision.
The actual application of this model to thirty-two textile companies listed on the Korean Stock Exchange revealed that the forecasting errors of five intermediate variables depend highly on the estimates of sales and EBIT. ROI cumulative distribution, the ultimate result of Model II, varies significantly according to company's growth rate and profitability.
