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

Expert Solution

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 :-

Cash Inflows
Rate of Interest
Cash Outflows
Duration of Projects
Demand Forecast
Types of Management
Technological Change
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.

jeff jeffy answered 1 year ago

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