Questions

Q15.1 What is capital budgeting?

Q15.2 What major steps are involved in the capital budgeting process?

Q15.3 Why do accounting income statements provide only an imperfect basis for investment decisions, and what steps must be taken to adjust these data?

Q15.4 Explain the underlying rationale for using the NPV approach to investment project selection.

Q15.5 Why do the NPV, PI, and IRR capital budgeting decision rules sometimes provide conflicting rank orderings of investment project alternatives?

Q15.6 How is a crossover discount rate calculated, and how does it affect capital budgeting decisions?

Q15.7 In an earlier chapter, it was argued that factors should be used in such proportions that the marginal product/price ratios for all inputs are equal. In terms of capital budgeting, this implies that the marginal net cost of debt should equal the marginal net cost of equity in the optimal capital structure. Yet firms often issue debt at interest rates substantially below the yield that investors require on the firm's equity shares. Does this mean that such firms are not operating with optimal capital structures? Explain.

Q15.8 Explain why the intersection of the IOS and MCC curves defines an economically optimal capital budget.

Q15.9 Recent academic studies in financial economics conclude that stockholders of target firms in takeover bids "win" (earn abnormal returns) and that stockholders of successful bidders do not lose subsequent to takeovers, even though takeovers usually occur at substantial premiums over prebid market prices. Is this observation consistent with capital market efficiency?

Q15.10 What important purposes are served by the postaudit?

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