Capital Budgeting in 1992: A Survey

Bierman, Harold

doi:10.2307/3665921

Cited by 70 publications

(44 citation statements)

References 0 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…The international literature on the use of different capital budgeting techniques by financial managers has been characterized by studies conducted in economies whose characteristics differ significantly from the Brazilian context (Bierman, 1993;Graham & Harvey, 2002), although studies in emerging economies can be found (Du Toit & Pienaar, 2005). Namely, the research conducted by Gitman and Forrester (1997), in the United States; Brounen et al, (2004), in Europe; Hermes et al, (2007), who compared the practices adopted in China and the Netherlands.…”

Section: Previous Studies Regarding Capital Budgeting Practicesmentioning

confidence: 99%

“…This article contributes to the literature by focusing on the determinants of capital budgeting practices, comparing listed and unlisted companies. Among the Finance studies featuring surveys, one of the categories found in the literature focuses on capital budgeting practices and techniques adopted by the company (Gitman & Forrester, 1977;Schall, Sundem, & Geijsbeek, 1978;Bierman, 1993;Ryan & Ryan, 2002).…”

Section: Previous Studies Regarding Capital Budgeting Practicesmentioning

confidence: 99%

See 1 more Smart Citation

Stock Exchange Listing Induces Sophistication of Capital Budgeting

Mendes‐Da‐Silva

Saito

2014

Rev. adm. empres.

View full text Add to dashboard Cite

This article compares capital budgeting techniques employed in listed and unlisted companies in Brazil. We surveyed the Chief Financial Officers (CFOs) of 398 listed companies and 300 large unlisted companies, and based on 91 respondents, the results suggest that the CFOs of listed companies tend to use less simplistic methods more often, for example: NPV and CAPM, and that CFOs of unlisted companies are less likely to estimate the cost of equity, despite being large companies. These findings indicate that stock exchange listing may require greater sophistication of the capital budgeting process. KEYWORDS | Capital budgeting, finance survey, financial decisions, corporate finance, financial innovation. RESUMO Este artigo compara técnicas de orçamento de capital empregadas nas empresas listadas e não-listadas no Brasil. Emprega-se um survey dirigido aos Chief Financial Officers (CFOs) de 398 empresas listadas e 300 grandes empresas não-listadas e, com base em 91 respondentes, os resultados sugerem que os CFOs das empresas listadas tendem a usar mais intensamente métodos menos simplistas, e.g. VPL e CAPM, e que CFOs de empresas não-listadas menos provavelmente estimam o custo de capital próprio, mesmo se tratando de empresas de grande porte. Esses achados indicam que a listagem em bolsa pode requerer maior sofisticação do processo de orçamento de capital. PALAVRAS-CLAVE | Orçamento de Capital, survey em finanças, decisões financeiras, finanças corporativas, inovação financeira. RESUMEN El presente artículo compara las técnicas de presupuestación empleadas por las empresas brasileñas cotizadas y no cotizadas. Encuestamos a los Gerentes de Finanzas Corporativos (Chief

show abstract

Section: Previous Studies Regarding Capital Budgeting Practicesmentioning

confidence: 99%

Section: Previous Studies Regarding Capital Budgeting Practicesmentioning

confidence: 99%

Stock Exchange Listing Induces Sophistication of Capital Budgeting

Mendes‐Da‐Silva

Saito

2014

Rev. adm. empres.

View full text Add to dashboard Cite

show abstract

“…The cost of debt should also reflect the effective tax rate, and the tax benefit associated with debt. Hence, we estimate these inputs by a trapezoidal possibility distribution of the form: K is the smallest value for the cost of equity; 4 t is the greatest value and 1 t is the smallest value for the effective tax rate;…”

Section: A Fuzzy Wacc Modelmentioning

confidence: 99%

“…Four decades later, the CAPM still remains the predominant model to estimate the cost of equity as shown in numerous surveys of corporate practice (Bruner et al [3]; Bierman [4]; Gitman and Vandenberg [5]; Graham and Harvey [6]; Arnold and Hatzopoulos [7]; McLaney, Pointon, Thomas and Tucker [8]; and Brounen, De Jong and Koedijk [9]); however, a series of influential papers, based on the failure of the CAPM in empirical tests, have doubted the performance of CAPM (Chopra, Lakonishok and Ritter [10]; Fama and French [11]; Davis [12]; Barber and Lyon [13]; and Roll [14]), and argued that beta is not favorable in explaining the cross-section of stock returns. In response, several studies (Black [15]; Kothari et al [16]; and Sharpe [17]) persisted that the CAPM is still the best model for estimating the cost of equity and all the empirical results conflicting with the CAPM are due to selection bias or the mis-measurement of beta.…”

Section: Introductionmentioning

confidence: 99%

An Application of Fuzzy Set Theory to the Weighted Average Cost of Capital and Capital Structure Decision

Wang¹,

Hwang²

2010

View full text Add to dashboard Cite

The purpose of this paper is to present the use of fuzzy logic to improve the calculation of weighted average cost of capital (WACC). The fuzzy WACC approach not only allows the pre-tax cost of debt, the effective tax rate, the tax benefit, and cost of equity to be treated as fuzzy numbers, it also offers ranking means to find the optimal debt ratio. This paper contributes to the literature by offering alternative methods to calculate the WACC and the optimal debt ratio for firms under uncertainty. Compared with the traditional WACC, the fuzzy WACC model can overcome the problems pertinent to uncertainty, complexity and imprecision. This paper thus sheds light on capital structure decision making.

show abstract

“…Moore and Reichert (1983), who survey 298 Fortune 500 firms find that 86% of firms surveyed use time-adjusted capital budgeting techniques. Bierman (1993) finds that all 74 responding Fortune 100 companies use some form of discounting, and 93% calculate the weighted average cost of capital.…”

Section: Practice In the Fieldmentioning

confidence: 99%

Do We Need CAPM for Capital Budgeting?

Jagannathan¹,

Meier²

2002

Financial Management

View full text Add to dashboard Cite

The classic rule for making capital budgeting decisions is to take projects with positive Net Present Value (NPV). Consider a project that generates an annual, real cash flow of 100,000 forever, starting one year from now. The initial investment is 1,600,000. To decide whether to invest in this project or not, we discount all future cash flows and subtract the initial investment to get the NPV. The decision rule is then simple: If the NPV is positive, take it; if the NPV is negative, leave it. The current textbooks used in all major MBA courses advise financial managers to calculate the cost of capital based on the Capital Asset Pricing Model (CAPM). The project's cost of capital is the rate investors require to undertake the investment, and we should discount all future cash flows at this rate. The cost of capital in the CAPM equals the riskfree rate plus a risk premium. The CAPM asserts that the only relevant risk measure for a project is it beta. The beta factor times the excess return of the market over the riskfree rate determines the risk premium of the investment.A key input for the CAPM is the excess return of the market over the riskfree rate, the market (equity) risk premium. The common practice has been to use the historical average return over a long period as a measure of what investors expect to earn. As a proxy for the market portfolio, a broad equity market index is applied. For the US the average market risk premium of the S&P 500 was 7.43% during the post-war period, whereas the real riskfree rate (six-month commercial paper) was 2.19%. Assuming that the project beta is 1.0 and the firm is 100% equity financed, the cost of capital is 2.19% + 1 X 7.43% = 9.62% and the NPV of our project is negative:100,000/ 0.0962 -1,600,000 = -560,499. We would decide against investing.However, a new strand of literature starting with Blanchard (1993) takes a forward-looking perspective to determine the market risk premium. Instead of taking an average over a past period, these studies infer the rate that justifies the current stock market index level given the expected dividends or earnings of all companies in the index. The evidence from this literature suggests that the market risk premium has been only about 2-4% during the last two decades, substantially below the average return of 7.43% for 1951-2000. If we take the value of 2.55% as the equity premium, the estimate that Fama and French (2001) obtain, the NPV of the same

show abstract

Capital Budgeting in 1992: A Survey

Cited by 70 publications

References 0 publications

Stock Exchange Listing Induces Sophistication of Capital Budgeting

Stock Exchange Listing Induces Sophistication of Capital Budgeting

An Application of Fuzzy Set Theory to the Weighted Average Cost of Capital and Capital Structure Decision

Do We Need CAPM for Capital Budgeting?

Contact Info

Product

Resources

About