PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 11, Problem 1PS
Capital budgeting process* True or false?
- a. The approval of a firm’s capital budget allows managers to go ahead with any project included in the budget.
- b. Capital budgets and project authorizations are mostly developed “bottom up.” Strategic planning is a “top-down” process.
- c. Project sponsors are likely to be overoptimistic.
a)
Expert Solution
Summary Introduction
To discuss: The items whether true or false on the bases of capital budgeting process.
Explanation of Solution
False. Firm’s capital budget isn’t the ultimate sign-off for the specific projects. Most firms need each project appropriation requests and includes more detailed analysis. The capital budgeting is often pruned and revised according to the market conditions.
b)
Expert Solution
Summary Introduction
To discuss: The item whether true or false on the bases of capital budgeting process.
Explanation of Solution
False, the firm’s capital budget should reflect both bottom-up operational detail as well as top-down strategic views.
c)
Expert Solution
Summary Introduction
To discuss: The item whether true or false on the bases of capital budgeting process.
Explanation of Solution
True because cash flow forecasts are regularly overstated.
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Students have asked these similar questions
Case Study: Identifying Errors in Capital Budgeting Decisions
Introduction:
Capital budgeting decisions play a crucial role in the financial success of a company, impacting its long-term viability. Managers strive to make accurate and informed decisions when evaluating potential investment projects. However, errors can occur, and it is essential to implement effective procedures to identify and rectify these mistakes. This case study explores various procedures and their efficacy in identifying errors in capital budgeting decisions.
Background:
Company XYZ, a manufacturing firm, recently implemented a capital budgeting decision involving a significant investment in upgrading its production facilities. The decision-making process was intricate, considering factors such as projected cash flows, discount rates, and risk assessments. Despite thorough analysis, the management recognizes the importance of post-evaluation procedures to identify potential errors and enhance…
The purpose of capital budgeting is to:
Group of answer choices
Avoid all projects that involve risk
control the short-term financing used by a firm.
determine the correct mix of debt and equity for a firm.
identify assets/projects that produce value in excess of their cost.
Distinguish among beta (or market) risk, within-firm (or corporate) risk, and stand-alone risk for a project being considered for inclusion in the capital budget. In theory, market risk should be the only “relevant” risk. However, companies focus as much on stand-alone risk as on market risk. What are the reasons for the focus on stand-alone risk?
Chapter 11 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 11 - Capital budgeting process True or false? a. The...Ch. 11 - Capital budgeting process Explain how each of the...Ch. 11 - Capital budgeting process Draw up an outline or...Ch. 11 - Prob. 4PSCh. 11 - Biased forecasts Look back to the cash flows for...Ch. 11 - Prob. 6PSCh. 11 - Prob. 7PSCh. 11 - Prob. 8PSCh. 11 - Market prices Suppose the current price of gold is...Ch. 11 - Prob. 10PS
Ch. 11 - Prob. 11PSCh. 11 - Prob. 12PSCh. 11 - Prob. 13PSCh. 11 - Economic rents True or false? a. A firm that earns...Ch. 11 - Prob. 16PSCh. 11 - Economic rents Thanks to acquisition of a key...Ch. 11 - Prob. 18PSCh. 11 - Prob. 19PSCh. 11 - Prob. 20PSCh. 11 - Prob. 21PSCh. 11 - Prob. 22PSCh. 11 - Economic rents Taxes are a cost, and, therefore,...Ch. 11 - Prob. 1MCCh. 11 - Libby Flannery, the regional manager of Ecsy-Cola,...
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- Capital budgeting can be affected by factors such as exchange rate risk, political risk, transfer pricing, and strategic risk. Select a mid- or large-sized business organization and explain how each of these factors can affect its capital budgeting. Which factor poses the greatest threat to your selected organization and why? What measures can stakeholders take to reduce adverse impacts of these factors?arrow_forwardYou can come across different situations in your life where the concepts from capital budgeting will help you in evaluating the situation and making calculated decisions. Consider the following situation: The following table contains five definitions or concepts. Identify the term that best corresponds to the concept or definition given. Concept or Definition Term An example of externality that can have a negative effect on a firm The cash flow at the end of the life of the project Creates value for a company because it gives the company the right but not the obligation to take future action to increase its cash flows The risk of a project without factoring in the impact of diversification A risk analysis technique that measures changes in the internal rate of return (IRR) and net present value (NPV) as individual variables are changed Marston Manufacturing Co. owns a warehouse that it is not currently using. It could sell…arrow_forward8. Conclusions about capital budgeting The decision process Before making capital budgeting decisions, finance professionals often generate, review, analyze, select, and implement long-term investment proposals that meet firm-specific criteria and are consistent with the firm’s strategic goals. Companies often use several methods to evaluate the project’s cash flows and each of them has its benefits and disadvantages. Based on your understanding of the capital budgeting evaluation methods, which of the following conclusions about capital budgeting are valid? Check all that apply. The NPV shows how much value the company is creating for its shareholders. Managers have been slow to adopt the IRR, because percentage returns are a harder concept for them to grasp. For most firms, the reinvestment rate assumption in the MIRR is more realistic than the assumption in the IRR. True or False: Sophisticated firms use only the NPV method in capital budgeting…arrow_forward
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