Lessons

- CFA Level 2: Corporate Finance Part 1 – Introduction
- Introduction to Capital Structure and Leverage
- Introductory Capital Budgeting Remarks
- Expansion Projects vs. Replacement Projects and Cash Flows
- Impacts of Depreciation Method Choice on Capital Budget Analysis
- Inflation and Capital Budgeting
- Mutually Exclusive Capital Projects with Unequal Lives
- Equivalent Annual Annuity (EAA) Approach
- Least Common Multiple of Lives Approach
- Stand Alone Risk and Capital Projects
- CAPM and a Capital Project’s Discount Rate
- Capital Projects and Real Options
- Common Pitfalls in Capital Budgeting
- Capital Budgeting Alternatives to NPV and IRR Analysis
- Modigliani-Miller and Capital Structure Theory
- Evaluating Capital Structure Policy
- International Differences in Financial Leverage
- Dividend and Share Repurchase Policies
- Factors Affecting Corporate Dividend Policy Decisions
- Signals from Dividend Policies

# Introductory Capital Budgeting Remarks

- Capital budgeting is the diligence process that a company performs to determine what investment projects it will undertake.
- Application of these principles is relevant as an internal corporate finance analyst or as an external debt or equity analyst at a financial services company.
- Theoretically, a company will only commence projects which are expected to increase the firm’s value.
**Value of a capital project**= present value of expected after tax cash flows, discounted at an appropriate risk adjusted rate.**Discount Rate:**commonly the firm’s marginal weighted average cost of capital (WACC), however in certain circumstances it may be appropriate to revise WACC depending on a project’s increased or decreased exposure to market risk.

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