Question

What are the two complications that arise in practice with optimal capital budget? Explain.

What are the two complications that arise in practice with optimal capital budget? Explain.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

The optimal capital budget is the set of projects that maximizes the value of the firm. Finance theory states that all projects with positive net present values (NVP) should be accepted, and the optimal capital budget consists of these positive NPV projects. However, two complications arise in practice:

(1) an increasing marginal cost of capital and

(2) capital rationing.

The optimal capital budget is the amount of spending that allows you to accept the maximum number of positive NPV projects (Point at which the IRR intersects the WACC)

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Explain what an optimal capital structure consists of.
Explain what an optimal capital structure consists of.
What is the effect of a fall in price of capital on the optimal amount of...
What is the effect of a fall in price of capital on the optimal amount of labor and capital used in production? Explain your answer using diagram(s), and explain scale and substitution effect.
How does the price in the kink demand curve arise? explain graphically. Also       give an...
How does the price in the kink demand curve arise? explain graphically. Also       give an example of kinked dd curve in practice.
What is the so called “optimal capital structure”?  
What is the so called “optimal capital structure”?  
The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the...
The managers of Kenforest Grocers are trying to determine the company's optimal capital budget for the upcoming year. Kenforest is considering the following projects: (a) No budget limitation (b) limit to $230 million Project Required investment (in millions) Risk-adjusted WACC NPV (in millions) Profitability Index Ranking Available Capital Ranking A $200 $50 B 70 45 C 150 40 D 30 30 E 120 20 F 100 5 G 50 -1 H 10 -5 Which of the projects will the company...
what is the optimal capital structure for a company and what is the impact it has...
what is the optimal capital structure for a company and what is the impact it has on corporate value
Capital rationing: NPV approach A firm with a 13% cost of capital must select the optimal...
Capital rationing: NPV approach A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given its capital budget of $1 million. Project Initial investment NPV at 13% cost of capital A −$300,000 $ 84,000 B   −200,000    10,000 C   −100,000    25,000 D   −900,000    90,000 E   −500,000    70,000 F   −100,000    50,000 G   −800,000 160,000 Calculate the present value of cash inflows associated with each project. Select the optimal group of...
The purpose of Economic Life Analysis is to: Determine the optimal investment life of a project...
The purpose of Economic Life Analysis is to: Determine the optimal investment life of a project Determine the optimal cost of capital for a project Evaluate two mutually exclusive projects for their crossover rate Determine the optimal capital budget of a project None of the above
What are two potential dietary linked complications of pregnancy? Please include the references
What are two potential dietary linked complications of pregnancy? Please include the references
1. Explain how the intertemporal budget constraint and indi§erence curves are used to derive a consumerís...
1. Explain how the intertemporal budget constraint and indi§erence curves are used to derive a consumerís optimal choice of current and future consumption. 2. Explain how the desired levels of capital and investment are a§ected by changes in the expected marginal product of capital, the user cost of capital, and taxes.
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT