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Sound and clearly corporate finance decisions are necessary for ensuring that the decisions made by the management maximize the welfare of the shareholders. While various factors may influence the financial decisions made by the management, capital budget, cost of capital, the risk associated with various investments, and specific risks in a project or the firm play a leading role in influencing this decision. This paper will analyze the various factors that are pertinent in corporate finance with respect to capital budget, the cost of capital, specific risk factors in various sources of capital, project versus firm risk.
Capital Budget
In capital budgeting, the use of NPV and IRR is higher in large firms than small firms. NPV and IRR are also commonly used in firms that have high leverage level, CEOs who have MBAs, and those that pay dividends. Sensitivity analysis is also common in firms with high leverage levels than those with little leverage levels. On the contrary, the payback period is preferred in small firms, among CEOs who do not possess an MBA and those that do not pay dividends. The main motivation for use of payback period in small firms is due to their exposure to more volatile projects (Graham and Harvey 1-10). Since NPV provides a more elaborate measure of future value than payback period, this information is important in enabling investors to evaluate the accuracy of financial information from various firms (Jurek 2189-2211). In general, financial information from firms that use NPV is more credible than those that use payback period.
Cost of Capital
Capital asset pricing model (CAPM) is the most popular method of estimating the cost of capital, it is followed by the average stock return, and lastly the multi beta CAPM. Very few firms use the dividend discount model to evaluate the cost of equity. Large firms and CEOs with MBA are more likely to use CAPM. Smaller firms, on the other hand, mainly use the cost of equity capital. Firms that have smaller management ownership and those with low leverage levels also prefer to use CAPM (Graham and Harvey 1-10). The analysis of the cost of capital is important in enabling investors to identify the factors used to analyze the underlying cost of finance for investments. This information is essential in enabling investors to estimate the probable profits they will make from their investments (Wong 95-104).
Risk Factor
The various risk factors in an organization are fundamental, momentum, and macroeconomic factors. Most firms incorporate the risks of changes in the risk factors in their cash flow. Specifically, firms incorporate factors that are related to inflation, foreign exchange rate, interest rate, and GDP growth risk factors. On the contrary, few companies make changes on their cash flows and discount rates due to book-to-market distress or momentum risks. In large firms, foreign exchange risk, commodity price risk, business cycle risk, and interest rate risk are the most important risk factors. In particular, foreign exchange risk is their most important nonmarket risk factor, which is followed by risk caused by business cycles. In small businesses, interest rate risk and labor risk are the main important risk factor. The most important risk factors for businesses with a lot of foreign trade and growth firms the foreign exchange risk factor. In highly levered firms, the most important factor is the business cycle risk factor (Graham and Harvey 1-10). How the risk factor is calculated is important in enabling investors to evaluate the rate of exposure of their investment and in identifying any unaccounted for exposure that may result in greater variance than the ones that have been indicated (Wong 95-104).
Project Versus Firm Risk
            When evaluating the risk posed by projects located in overseas,a  firm has the option of using company-wide risk or project risk. Most companies use company-wide discount rate to evaluate risks from projects. Further, they would also use risk-matched discount rate to evaluate the projects. Firms that do not adjust cash flows for foreign exchange risks are less likely to use risk-matched discount rates when evaluating projects. Finally, CEOs with short tenure use company-wide discount rate to evaluate risks than those with a long tenure (Graham and Harvey 1-10). These metrics indicate if a company is revealing clearly all risks posed by each investment, the use of company-wide discount rate ensures that risks are spread in the entire company, which makes it difficult for investors to identify specific risks posed by each investment (Jurek 2189-2210).
Given the importance of finance in an organization, businesses must disclose information pertaining to its cost and allocation in the company. In addition, businesses should use a standardized method in order to ensure there is comparability of various firms. Moreover, where the use of a standardized format may be misleading due to the nature of business or risk exposure of various projects, firms should disclose how the cost of capital has been calculated in the firm. In this manner, investors may be able to make prudent financial decisions concerning the capital in the firm.
 
 
 
 
Works Cited
Graham, J., and Harvey, C. “The Theory and Practice of Corporate Finance: Evidence From the Field.” Journal of Financial Economics, vol. 61, no. 1, 2001, p. 1-53.
Jurek, J., and Stafford, E. “The Cost of Capital for Alternative Investments.” The Journal of Finance, Vol. LXX, no. 5, 2015, p. 2189-2232.
Wong, M. “Managerial Decisions and the Weighted Average Cost of Capital.” Journal of the Academy of Finance, vol. 1, no. 1, 2008, p. 95-105
 
Name
Tutor
Course
Date
Theory and Practice of Corporate Finance
Sound and clearly corporate finance decisions are necessary for ensuring that the decisions made by the management maximize the welfare of the shareholders. While various factors may influence the financial decisions made by the management, capital budget, cost of capital, the risk associated with various investments, and specific risks in a project or the firm play a leading role in influencing this decision. This paper will analyze the various factors that are pertinent in corporate finance with respect to capital budget, the cost of capital, specific risk factors in various sources of capital, project versus firm risk.
Capital Budget
In capital budgeting, the use of NPV and IRR is higher in large firms than small firms. NPV and IRR are also commonly used in firms that have high leverage level, CEOs who have MBAs, and those that pay dividends. Sensitivity analysis is also common in firms with high leverage levels than those with little leverage levels. On the contrary, the payback period is preferred in small firms, among CEOs who do not possess an MBA and those that do not pay dividends. The main motivation for use of payback period in small firms is due to their exposure to more volatile projects (Graham and Harvey 1-10). Since NPV provides a more elaborate measure of future value than payback period, this information is important in enabling investors to evaluate the accuracy of financial information from various firms (Jurek 2189-2211). In general, financial information from firms that use NPV is more credible than those that use payback period.
Cost of Capital
Capital asset pricing model (CAPM) is the most popular method of estimating the cost of capital, it is followed by the average stock return, and lastly the multi beta CAPM. Very few firms use the dividend discount model to evaluate the cost of equity. Large firms and CEOs with MBA are more likely to use CAPM. Smaller firms, on the other hand, mainly use the cost of equity capital. Firms that have smaller management ownership and those with low leverage levels also prefer to use CAPM (Graham and Harvey 1-10). The analysis of the cost of capital is important in enabling investors to identify the factors used to analyze the underlying cost of finance for investments. This information is essential in enabling investors to estimate the probable profits they will make from their investments (Wong 95-104).
Risk Factor
The various risk factors in an organization are fundamental, momentum, and macroeconomic factors. Most firms incorporate the risks of changes in the risk factors in their cash flow. Specifically, firms incorporate factors that are related to inflation, foreign exchange rate, interest rate, and GDP growth risk factors. On the contrary, few companies make changes on their cash flows and discount rates due to book-to-market distress or momentum risks. In large firms, foreign exchange risk, commodity price risk, business cycle risk, and interest rate risk are the most important risk factors. In particular, foreign exchange risk is their most important nonmarket risk factor, which is followed by risk caused by business cycles. In small businesses, interest rate risk and labor risk are the main important risk factor. The most important risk factors for businesses with a lot of foreign trade and growth firms the foreign exchange risk factor. In highly levered firms, the most important factor is the business cycle risk factor (Graham and Harvey 1-10). How the risk factor is calculated is important in enabling investors to evaluate the rate of exposure of their investment and in identifying any unaccounted for exposure that may result in greater variance than the ones that have been indicated (Wong 95-104).
Project Versus Firm Risk
            When evaluating the risk posed by projects located in overseas,a  firm has the option of using company-wide risk or project risk. Most companies use company-wide discount rate to evaluate risks from projects. Further, they would also use risk-matched discount rate to evaluate the projects. Firms that do not adjust cash flows for foreign exchange risks are less likely to use risk-matched discount rates when evaluating projects. Finally, CEOs with short tenure use company-wide discount rate to evaluate risks than those with a long tenure (Graham and Harvey 1-10). These metrics indicate if a company is revealing clearly all risks posed by each investment, the use of company-wide discount rate ensures that risks are spread in the entire company, which makes it difficult for investors to identify specific risks posed by each investment (Jurek 2189-2210).
Given the importance of finance in an organization, businesses must disclose information pertaining to its cost and allocation in the company. In addition, businesses should use a standardized method in order to ensure there is comparability of various firms. Moreover, where the use of a standardized format may be misleading due to the nature of business or risk exposure of various projects, firms should disclose how the cost of capital has been calculated in the firm. In this manner, investors may be able to make prudent financial decisions concerning the capital in the firm.
 
 
 
 
Works Cited
Graham, J., and Harvey, C. “The Theory and Practice of Corporate Finance: Evidence From the Field.” Journal of Financial Economics, vol. 61, no. 1, 2001, p. 1-53.
Jurek, J., and Stafford, E. “The Cost of Capital for Alternative Investments.” The Journal of Finance, Vol. LXX, no. 5, 2015, p. 2189-2232.
Wong, M. “Managerial Decisions and the Weighted Average Cost of Capital.” Journal of the Academy of Finance, vol. 1, no. 1, 2008, p. 95-105
 
Name
Tutor
Course
Date
Theory and Practice of Corporate Finance
Sound and clearly corporate finance decisions are necessary for ensuring that the decisions made by the management maximize the welfare of the shareholders. While various factors may influence the financial decisions made by the management, capital budget, cost of capital, the risk associated with various investments, and specific risks in a project or the firm play a leading role in influencing this decision. This paper will analyze the various factors that are pertinent in corporate finance with respect to capital budget, the cost of capital, specific risk factors in various sources of capital, project versus firm risk.
Capital Budget
In capital budgeting, the use of NPV and IRR is higher in large firms than small firms. NPV and IRR are also commonly used in firms that have high leverage level, CEOs who have MBAs, and those that pay dividends. Sensitivity analysis is also common in firms with high leverage levels than those with little leverage levels. On the contrary, the payback period is preferred in small firms, among CEOs who do not possess an MBA and those that do not pay dividends. The main motivation for use of payback period in small firms is due to their exposure to more volatile projects (Graham and Harvey 1-10). Since NPV provides a more elaborate measure of future value than payback period, this information is important in enabling investors to evaluate the accuracy of financial information from various firms (Jurek 2189-2211). In general, financial information from firms that use NPV is more credible than those that use payback period.
Cost of Capital
Capital asset pricing model (CAPM) is the most popular method of estimating the cost of capital, it is followed by the average stock return, and lastly the multi beta CAPM. Very few firms use the dividend discount model to evaluate the cost of equity. Large firms and CEOs with MBA are more likely to use CAPM. Smaller firms, on the other hand, mainly use the cost of equity capital. Firms that have smaller management ownership and those with low leverage levels also prefer to use CAPM (Graham and Harvey 1-10). The analysis of the cost of capital is important in enabling investors to identify the factors used to analyze the underlying cost of finance for investments. This information is essential in enabling investors to estimate the probable profits they will make from their investments (Wong 95-104).
Risk Factor
The various risk factors in an organization are fundamental, momentum, and macroeconomic factors. Most firms incorporate the risks of changes in the risk factors in their cash flow. Specifically, firms incorporate factors that are related to inflation, foreign exchange rate, interest rate, and GDP growth risk factors. On the contrary, few companies make changes on their cash flows and discount rates due to book-to-market distress or momentum risks. In large firms, foreign exchange risk, commodity price risk, business cycle risk, and interest rate risk are the most important risk factors. In particular, foreign exchange risk is their most important nonmarket risk factor, which is followed by risk caused by business cycles. In small businesses, interest rate risk and labor risk are the main important risk factor. The most important risk factors for businesses with a lot of foreign trade and growth firms the foreign exchange risk factor. In highly levered firms, the most important factor is the business cycle risk factor (Graham and Harvey 1-10). How the risk factor is calculated is important in enabling investors to evaluate the rate of exposure of their investment and in identifying any unaccounted for exposure that may result in greater variance than the ones that have been indicated (Wong 95-104).
Project Versus Firm Risk
            When evaluating the risk posed by projects located in overseas,a  firm has the option of using company-wide risk or project risk. Most companies use company-wide discount rate to evaluate risks from projects. Further, they would also use risk-matched discount rate to evaluate the projects. Firms that do not adjust cash flows for foreign exchange risks are less likely to use risk-matched discount rates when evaluating projects. Finally, CEOs with short tenure use company-wide discount rate to evaluate risks than those with a long tenure (Graham and Harvey 1-10). These metrics indicate if a company is revealing clearly all risks posed by each investment, the use of company-wide discount rate ensures that risks are spread in the entire company, which makes it difficult for investors to identify specific risks posed by each investment (Jurek 2189-2210).
Given the importance of finance in an organization, businesses must disclose information pertaining to its cost and allocation in the company. In addition, businesses should use a standardized method in order to ensure there is comparability of various firms. Moreover, where the use of a standardized format may be misleading due to the nature of business or risk exposure of various projects, firms should disclose how the cost of capital has been calculated in the firm. In this manner, investors may be able to make prudent financial decisions concerning the capital in the firm.
 
 
 
 
Works Cited
Graham, J., and Harvey, C. “The Theory and Practice of Corporate Finance: Evidence From the Field.” Journal of Financial Economics, vol. 61, no. 1, 2001, p. 1-53.
Jurek, J., and Stafford, E. “The Cost of Capital for Alternative Investments.” The Journal of Finance, Vol. LXX, no. 5, 2015, p. 2189-2232.
Wong, M. “Managerial Decisions and the Weighted Average Cost of Capital.” Journal of the Academy of Finance, vol. 1, no. 1, 2008, p. 95-105
 
Name
Tutor
Course
Date
Theory and Practice of Corporate Finance
Sound and clearly corporate finance decisions are necessary for ensuring that the decisions made by the management maximize the welfare of the shareholders. While various factors may influence the financial decisions made by the management, capital budget, cost of capital, the risk associated with various investments, and specific risks in a project or the firm play a leading role in influencing this decision. This paper will analyze the various factors that are pertinent in corporate finance with respect to capital budget, the cost of capital, specific risk factors in various sources of capital, project versus firm risk.
Capital Budget
In capital budgeting, the use of NPV and IRR is higher in large firms than small firms. NPV and IRR are also commonly used in firms that have high leverage level, CEOs who have MBAs, and those that pay dividends. Sensitivity analysis is also common in firms with high leverage levels than those with little leverage levels. On the contrary, the payback period is preferred in small firms, among CEOs who do not possess an MBA and those that do not pay dividends. The main motivation for use of payback period in small firms is due to their exposure to more volatile projects (Graham and Harvey 1-10). Since NPV provides a more elaborate measure of future value than payback period, this information is important in enabling investors to evaluate the accuracy of financial information from various firms (Jurek 2189-2211). In general, financial information from firms that use NPV is more credible than those that use payback period.
Cost of Capital
Capital asset pricing model (CAPM) is the most popular method of estimating the cost of capital, it is followed by the average stock return, and lastly the multi beta CAPM. Very few firms use the dividend discount model to evaluate the cost of equity. Large firms and CEOs with MBA are more likely to use CAPM. Smaller firms, on the other hand, mainly use the cost of equity capital. Firms that have smaller management ownership and those with low leverage levels also prefer to use CAPM (Graham and Harvey 1-10). The analysis of the cost of capital is important in enabling investors to identify the factors used to analyze the underlying cost of finance for investments. This information is essential in enabling investors to estimate the probable profits they will make from their investments (Wong 95-104).
Risk Factor
The various risk factors in an organization are fundamental, momentum, and macroeconomic factors. Most firms incorporate the risks of changes in the risk factors in their cash flow. Specifically, firms incorporate factors that are related to inflation, foreign exchange rate, interest rate, and GDP growth risk factors. On the contrary, few companies make changes on their cash flows and discount rates due to book-to-market distress or momentum risks. In large firms, foreign exchange risk, commodity price risk, business cycle risk, and interest rate risk are the most important risk factors. In particular, foreign exchange risk is their most important nonmarket risk factor, which is followed by risk caused by business cycles. In small businesses, interest rate risk and labor risk are the main important risk factor. The most important risk factors for businesses with a lot of foreign trade and growth firms the foreign exchange risk factor. In highly levered firms, the most important factor is the business cycle risk factor (Graham and Harvey 1-10). How the risk factor is calculated is important in enabling investors to evaluate the rate of exposure of their investment and in identifying any unaccounted for exposure that may result in greater variance than the ones that have been indicated (Wong 95-104).
Project Versus Firm Risk
            When evaluating the risk posed by projects located in overseas,a  firm has the option of using company-wide risk or project risk. Most companies use company-wide discount rate to evaluate risks from projects. Further, they would also use risk-matched discount rate to evaluate the projects. Firms that do not adjust cash flows for foreign exchange risks are less likely to use risk-matched discount rates when evaluating projects. Finally, CEOs with short tenure use company-wide discount rate to evaluate risks than those with a long tenure (Graham and Harvey 1-10). These metrics indicate if a company is revealing clearly all risks posed by each investment, the use of company-wide discount rate ensures that risks are spread in the entire company, which makes it difficult for investors to identify specific risks posed by each investment (Jurek 2189-2210).
Given the importance of finance in an organization, businesses must disclose information pertaining to its cost and allocation in the company. In addition, businesses should use a standardized method in order to ensure there is comparability of various firms. Moreover, where the use of a standardized format may be misleading due to the nature of business or risk exposure of various projects, firms should disclose how the cost of capital has been calculated in the firm. In this manner, investors may be able to make prudent financial decisions concerning the capital in the firm.
 
 
 
 
Works Cited
Graham, J., and Harvey, C. “The Theory and Practice of Corporate Finance: Evidence From the Field.” Journal of Financial Economics, vol. 61, no. 1, 2001, p. 1-53.
Jurek, J., and Stafford, E. “The Cost of Capital for Alternative Investments.” The Journal of Finance, Vol. LXX, no. 5, 2015, p. 2189-2232.
Wong, M. “Managerial Decisions and the Weighted Average Cost of Capital.” Journal of the Academy of Finance, vol. 1, no. 1, 2008, p. 95-105