Day: February 27, 2021

INTRODUCTION The opportunity cost of capital (or simply, the cost of capital) for a project is the discount rate for calculating the present value of cash flows. The project’s cost of capital is the minimum required rate of return on Read More …

INTRODUCTION An efficient allocation of capital is the most important finance function in the modern times. It involves decisions to commit the firm’s funds to the long-term assets. Capital budgeting or investment decisions are of considerable importance to the firm, Read More …

INTRODUCTION The important message of the preceding chapter is that sound investment decisions should be based on the net present value (NPV) rule. The first difficult problem to be resolved in applying the NPV rule in practice is: What should Read More …

INTRODUCTION In discussing the capital budgeting techniques, we have so far assumed that the proposed investment projects do not involve any risk. This assumption was made simply to facilitate the understanding of the capital budgeting techniques. In real-world situation, however, Read More …

INTRODUCTION Given the capital budgeting decision of a firm, it has to decide the way in which the capital projects will be financed. Every time the firm makes an investment decision, it is at the same time making a financing Read More …

INTRODUCTION In Chapter 12, we discussed the effect of leverage on the shareholders’ earnings and risk. Under favourable economic conditions, the earnings per share increase with financial leverage. But leverage also increases the financial risk of shareholders. As a result, Read More …