Brieflysummarizethemajorconclusionsoftheart.doc

1) Briefly summarize the major conclusions of the article relating to the preferred capital budgeting and cost of capital estimation techniques used by sample firms.According to the article, it shows that most companys use net present value (NPV) and internal rate of return (IRR) method as their most frequently used capital budgeting techniques. Further, the preference of for capital budgeting techniques used by firms is influenced by firm size, firm leverage, and CEO characteristics.Nearly three quarter CFO always or almost always use NPV and IRR method. In addition to this, Hurdle rate and Payback method is also well used by CFO. Especially, large firms intend more likely to use NPV method than small firms. They are also more likely to use supplementary sensitivity and VAR analyses.For the cost of capital techniques, the report test capital asset pricing model (CAPM), a multi-beta CAPM, average historical returns, and dividend discount model. The result shows that CAPM is far more popular than others, which is used by 73.5% respondents.The second and third most popular methods are average stock returns and a multibeta CAPM.Same as the use of capital budgeting method, the use cost of capital techniques are influence by firm size, CEO back grand, and firm leverage level.The report also considered the specific risk factors, project and firm risk based on cost of capital. The survey indicate that highly levered firrms are more likely to consider business cycle risk important. However, indebtedness does not a!ect whether firms adjust for interest rate risk, term structure risk, or distress risk. Non-growth firms are less sensitive to foreign exchange risk than are growth firms.2) Compare the findings of this study regarding the indicated preferences for capital budgeting and cost of capital estimation methods with those reported in previous studies, and suggest reason for any major differences observed.The findings of this study have many differences from previous studies. For capital budgeting part, previous studies are mainly about IRR and only focus on large companies. IRR use to be the mostly common used capital budgeting method in th past. For example, Gitman and Forrester (1977), in their survey of 103 large firms, find that only 9.8% of firms use net present value as their primary method and 53.6% report IRR as primary method.Stanley and Block (1984) find that 65% of respondents report IRR as their primary capital budgeting technique.For cost of capital part, their findings are sharply contrast with Gitman and Mercurio (1982) who survey 177 Fortune 1000 rms and find that only 29.9% of respondents use the CAPM in some fashion but find that 31.2% of the participants in their survey use a version of the dividend discount model to establish their cost of capital.There are many reasons that why the findings is different. First, this report focus on both large and small firms. Second, the reports sample is much larger than previous studies. Further, this report goes beyond NPV versus IRR analysis and ask whether firms use the following evaluation techniques: adjusted present value (see Brealey and Myers, 1996), payback period, discounted payback period, profitability index, and accounting rate of return. In addition, this report is interested in the importance of real options in project evaluation. Finally, techniques have changed by the time, some are provided not effective and some new theory are approved by firms CFO.3) Briefly summarize the major conclusions of the article relating to the preferred capital budgeting and cost of capital estimation techniques used by sample firms. Explain the possible theory-practice gaps that may available in capital budgeting and cost of capital estimation.The reporter report the results of a survey of capital budgeting techniques used by United Kingdom firms. Where possible, the evidence is combined with data collected over a 22 year period to provide a basis for the discussion of causes of trends. They observe that there has been a substantial narrowing of the theory-practice gap in the use of project appraisal methods.From the report, it is clear that all large firms are now using IRR and NPV, and over 90% of small and medium-sized firms are using these method. For the largest UK firms NPV has overtaken IRR as the most widely used method. Further, it is very popular to use all four evaluation method closely followed by the combination of payback, IRR and NPV.Possible theory-practice gapsThe standard NPV rule implicitly makes two assumptions which are often overlooked.When talk about the cost of capital estimation techniques, the report mention that the use of CAPM has increased significantly during two decades. The most popular method used in UK for selecting the minimum rate of rate is weight average cost of capital (WACC), Which over 50% of UK firms now employ WACC.Possible theory-practice gapManagerial ignorance of the more subtle and complex elements of DCF analysis.4) Compare and contrast the findings between Graham & Harveys and Arnold & Hatzopoulos paper.Similarities1. Both of two reports have mention the capital budgeting method and cost of capital method. And the main findings are generally same.2. Both of them agree that NPV and IRR is the mostly common use techniques when evaluating capital budget. And there is an significant change for the method, which is from payback period to NPV and IRR.3. CAPM is the most popular method to estimate