This discussion has 2 parts:
Cash Flow Estimation Biases
The estimation of the cash flows associated with an investment project is the most important step in the capital expenditure evaluation process. If the cash flow estimates associated with a project are inten- tionally or unintentionally biased, a firm’s resources are unlikely to be allocated to the set of investment projects that will maximize shareholder wealth.
There are several reasons why managers might produce biased cash flow estimates when preparing capital expenditure project proposals. First, a manager might be tempted to overestimate the revenues or underestimate the costs associated with a project if the manager is attempting to expand the resource base over which he or she has control. By biasing the estimates of a project’s cash flows upward, a manager is likely to receive a larger share of the investment resources of the firm. Because managerial compensa- tion is sometimes tied to the span of job responsibili- ties, managers may be tempted to expand this span of control at the expense of other areas in the firm.
Second, some firms tie employee compensation to performance relative to stated objectives—a compen- sation scheme often called management by objective. If a manager is confident that the best estimate of the cash flows from a proposed project is sufficiently large to guarantee project acceptance, the manager may be tempted to reduce these cash flow estimates to a level below the “most likely outcome” level, con- fident that the project will continue to be viewed as an acceptable investment and that it will be funded. How- ever, once the project is under way, the project man- ager will feel less pressure to meet projected performance standards. The downward bias in the cash flow estimates provides a cushion that permits suboptimal management of the project while achiev- ing the objectives enunciated when the project was first proposed.
What impact does intentionally biasing cash flow estimates for investment projects have on achieving the goal of shareholder wealth maximization?
Post by classmate 1
Firms with higher leverage and capital intensity might not have a financial analyst or oversee the cash flow estimation process as most of the forecast could be executed by a simulation method based on past experience or market behavior through software. Firm’s use both types of estimates and measure of financial and operating risks might also need to benchmark themselves against the standard cash flow related ratio like liquidity ratios additionally to estimate risk free cash flow positions. The more the economic life of a project the more uncertain would the pay-back period become and the timing of the discounted cash flows gain importance. More than multiple methods of forecasting, it is important to accurately estimate the discounting rate and cash flow streams over the economic life of the project.
The strategy of using WACC as a discount rate to discount the future expected future cash flows from the proposed capital budgeting projects is correct. The free cash flow to the firm must be discounted using WACC, while free cash flow to equity must be discounted using cost of equity.
Post by classmate 2
McConnell, J. &. (1975). McConnell, J., & Sandberg, C. (1975). The Weighted Average Cost of Capital: Some Questions on Its Definition, Interpretation, and Use: Comment. The Journal of Finance, 30(3), 883-886.
Moyer, R. C., McGuigan, J. R., & Rao, R. (2018). Contemporary financial management. Mason, OH: Cengage-Southwestern.
We value our customers, and so ensure that our papers are 100 percent original. Our Team of professionals does not miss the mark; they ensure that step by step each paper is written uniquely. We never duplicate or work as we compare papers rest assured. We deliver our work a day before time to ensure that you don’t miss your deadlines. It is not only doing the work but delivering it at the right time. We capture the consequences of late remittances. .
We value customer satisfaction here at popularessaywriters.com and make sure that you get the best value for your Money. It happens that sometimes you can pay twice for your order or may want to cancel it, or you feel that it doesn’t meet your requirements; our money back guarantee will give you the opportunity to get back your money. We will also refund 100% of money paid double. In case your paper does not satisfy your requirements , we request that you notify us via writing within 2 days otherwise on the third day we will assume that you have been satisfied. Do all your correspondences through our email address firstname.lastname@example.org.Read more
At popularessaywriters.com, our professional writers know the consequence plagiarism does for our clients. We have updated software’s such as article checker and copyscape to check for originality of the custom papers before submission of the final paper to the you. Our guarantee to the customer is that we will write 100% original papers for them that are quality, timely and of low cost. We have experienced professional and competent PhD writers who will write quality custom papers for you..Read more
. At popularessaywriters.com, we are proud to provide top-quality Essay writing service to our esteemed customers. We are ready to take up that challenging academic assignment that is giving you sleepless nights and simplify it for you according to your desired requirements. We are willing to revise your paper if it does not meet your requirements. At popularessaywriters.com, we do not compromise with quality; thus, we offer unlimited free revisions until the customer is satisfied with their custom paper. Our unlimited free revision services are provided under the following terms:.. .Read more
Popularessawriters.com knows that client’s information is an essential tool for our company. It means that whatever the client requests from our service is kept strictly confidential. It means that whoever writes for this company understands the terms and conditions hence you should not be worried because you will never see your work somewhere else...Read more
Rest assured that we will always be attentive to your needs and requirements. We belief in the phrase treat your neighbour as you would want them to treat you. We leave nothing to chance and always look forward to a good interaction with each other.. .Read more