Capital Budgeting Decisions: The End of the Roads Meets the Beginning of Another

Abstract

As promised, we are at long last to the end of our journey. After the long, tedious task of determining the WACC, we now just have to use it. While the hard part is over, arguably the most important step is yet to come. As stated several times, in order for a company to flourish financially, they must maximize shareholder wealth, which they do, in part, by ensuring company growth. This growth most often comes about as a result of the company undertaking new projects. Thus, we have to decide which projects to accept, and which to reject, in order to maximize shareholder wealth. As you can probably ascertain, a large part of this goes hand in hand with the discussion of cost of capital completed in the previous chapter. To put is as simply as possible, the objective of this chapter is to find the best possible projects, conditional upon the optimal capital structure used to finance said project. Or, we are finally combining the concepts of capital structure and capital budgeting.