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Article summary and analysis
HOW DO CFOS MAKE CAPITAL BUDGETING AND CAPITAL STRUCTURE DECISIONS?
by John Graham and Campbell Harvey, Duke University
Introduction
The current practices of the world of corporate finance form a great deal of information for understanding the gaps in theory and practice. Areas of capital budgeting and capital structure form essential elements to understand how the corporate firms follow best practices in managing their finances. It is essential to consider the impact of modifying capital budgeting and capital structure methods in order to build an effective level of capital management in the organization. It helps companies manage their asset investments effectively. A wide range of capital budgeting tools including NPV and IRR methods are used globally.
Survey summary
The article presented on capital budgeting is based on a survey including CFO’s of Fortune 500 companies and 4400 firms with officers who are members of the Financial Executives Institute. Sixty percent of the respondents had price-earnings ratios of 15 or greater which indicates that the firms participating in the survey are adopting robust capital budgeting practices. This makes the research extremely viable and helps consider that the practices used by these companies can help evaluate industry practices effectively.
The survey is based on NPV methods, IRR methods, adjusted present value, payback period, discounted payback period, profitability index, and accounting rate of return. This helps evaluate the long-term impact of each of these practices of capital budgeting in the asset investment in each of the organizations. At the same time, it also helps consider the gap between what students learn in finance courses as capital budgeting methods and the actual industry practices.
The results of the survey indicate that CFO’s usually use a particular method of capital budgeting and rarely change to another method. This indicates that capital...