Prepared for The Journal of Applied Corporate Finance Vol. 15‚ No. 1‚ 2002 How do CFOs make capital budgeting and capital structure decisions?1 John R. Graham Associate Professor of Finance‚ Fuqua School of Business‚ Duke University‚ Durham‚ NC 27708 USA Campbell R. Harvey Professor of Finance‚ Fuqua School of Business‚ Duke University‚ Durham‚ NC 27708 USA National Bureau of Economic Research‚ Cambridge‚ MA 02912 USA March 8‚ 2002 1A longer and more detailed version of this paper is published
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Capital budgeting (or investment appraisal) is the planning process used to determine whether an organization ’s long term investments such as new machinery‚ replacement machinery‚ new plants‚ new products‚ and research development projects are worth pursuing. It is budget for major capital‚ or investment‚ expenditures.[1] Many formal methods are used in capital budgeting‚ including the techniques such as * Accounting rate of return * Payback period * Net present value * Profitability
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CAPITAL BUDGETING DECISION Clark Paints To look into possible ways to trim total poduction costs. Make or purchase paint cans? Cost of new equipment Disposal value Life production - number of cans Annual production or purchase needs - number of cans Project life $ $ 200‚000 40‚000 5‚500‚000 1‚100‚000 5 years Number of workers needed Annual work-hours per employee Earnings per hour for employees Other annual benefits per employee - % of wages Annual health benefits per
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Capital Structure Decisions: Which Factors are Reliably Important? Murray Z. Frank1 and Vidhan K. Goyal2 First draft: March 14‚ 2003. Current draft: December 20‚ 2003. ABSTRACT This paper examines the relative importance of 38 factors in the leverage decisions of publicly traded U.S. firms from 1950 to 2000. The most reliable factors are median industry leverage (+ effect on leverage)‚ market-to-book ratio (-)‚ collateral (+)‚ bankruptcy risk as measured by Altman’s Z-Score (-)‚ dividend-paying
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Capital Budgeting Decision Process 1. Introduction The maximization of shareholder wealth can be achieved through dividend policy and increasing share price of the mark value. In order to derive more profits‚ our company shall invest potential investments which always cover a number of years. Those investments involve substantial initial outlay at the outset and the process. The management is responsible to participate in the process of planning‚ analyzing‚ evaluating‚ selecting
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Capital Budgeting: Decision Criteria Brigham and Daves Ch. 12 Christopher B. Alt CFA PhD What Is Capital Budgeting? Analysis of potential additions to fixed assets Long-term decisions typically involving large $ expenditures Making the ‘right’ capital budgeting decisions is enormously important to a firm’s future Should we build this plant? All rights reserved - Christopher B. Alt 2 Key Steps in Capital Budgeting Estimate CFs (inflows & outflows) Assess riskiness of CFs Determine
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CAPITAL BUDGETING – INVESTMENT DECISIONS SUBMITTED BY : Abhisht Sinha (08305) Himangi Malik (08321) Swagata Ghoshal (08337) Tijeel Kumar Tarun (08352 I. CASE ABOUT BUILT OPERATE AND TRANSFER The case taken is about Built Operate and Transfer. It is a feasibility report which was prepared to present economic analysis carried out on the project and contain result of economic evaluation of the project so that the owner can take investment decision and the project can be properly planned and
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According to Attrill and Mclaney‚ 2009‚ there are four (4) approaches to capital budgeting. The net present value (NPV) is one of such and is a summation of all discounted cash flows(Present Value) associated with whichever project(s) are undergoing appraisal. Every appraisal method have decision rules‚ examples include the Payback Period(PBP) which stipulates the approval of projects that pays back the initial investments within a specific period. For this method (Net Present Value) to be most
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Capital budgeting refers to the total process of generating‚ evaluating‚ selecting and following up on capital expenditure alternatives. The firm allocates or budgets financial resources to new investment proposals. Basically‚ the firm may be confronted with three types of capital budgeting decisions i) the accept/reject decision‚ ii) the mutually exclusively choice decision and iii) the capital rationing decision. i) Asset – reject decision: This is a fundamental decision in capital budgeting
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Cost of Capital 1. What is the WACC? a. Weighted Average Cost of Capital- most firms employ different types of capital‚ and because of their differences in risk‚ the difference securities have different required rates of return. Typically=debt‚ preferred stock and common equity. 2. What precautions must we take when measuring the WACC to use for capital budgeting decisions (future investment)? b. The company’s current and recent past book and market value structures. As well
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