Question

Discuss how capital budgeting process (assumptions, industry competition, and etc.) can affect a firm’s stock price

Answer 1

ANS: Capital Budgeting is an investment planning process that helps the Organisations in making Long term investments such as purchase of new plant & machinery, accepting any projects, research development etc through Firm's Capitalisation structure.

Factors that affects the Capital Budgeting are :-

1. Cash Inflows
2. Rate of Interest
3. Cash Outflows
4. Duration of Projects
5. Demand Forecast
6. Types of Management
7. Technological Change
8. Competative Strategy etc .

Capital Budgeting process Includes the following Steps :-

• Identify Investment Opportunities
• Tendering Investments proposals
• Decision making process
• Capital Budget preparation
• Implementing those Budgets
• Performance Analysis

By Analyzing above factors & process, it helps firm to decide whether proposals (projects) are viable for them or not. These decisions are based upon the calculation of NPV (Net present value) ; If NPV >0 or positive , it would be favourable for the firm to invest in that projects.

Thus, Capital Budgeting process helps the Firm to achieve wealth maximisation which further improves the Firm's Net Worth. when any firm is earning huge profits & there is substantial increase in their net worth , their value of shares jumps in the stock market.

In this way Capital Budgeting process affects the Firm's Stock Price.