CFO’s Capital Budgeting and Corporate Decisions
From the preceding discussion on capital budgeting employed as parameters in organizations, corporation and the entrepreneurship, will now discuss the character disposition of the Corporate Finance Officers (CFO’s) that executes the process of capital budgeting and being the core persona in project implementation. As cited in John Graham’s and Campbell Harvey’s survey in 2002, almost 60% of CFO’s refer to financial flexibility and credit ratings as important and suggests that avoiding financial distress is a major consideration in corporate debt policy.
Following are the critical findings as cited from the study (Graham, J. and Harvey, C. , 2002): • Big corporation employ the method of NPV and inflexible target debt ratio. • CFO’s debt regulation unintended to lessen the corporation’s weighted average cost of capital but to preserve financial flexibility to maintain targeted debt ratio. • NPV and IRR is the normally used capital budgeting techniques in which the minimal use of NPV by non-dividend-paying companies manifests potential growth.
• Capital Asset Pricing Model is the popular method to approximate the cost of equity capital, “BUT” majority of corporation uses their own technique on discount rate to appraise latest project of investment although similar project of investment seemingly have risk characteristics. Having perceived in Graham’s and Harvey’s finding is the corporate attitude of the CFO’s to always look at the profit potentials on project of investments.
Drawing the line between debt servicing and the ability to maintain financial flexibilities are the tactful orientation. Similar to lending firms in the Philippines, the noticeable peak season for lending is being on time at the devaluation of currency. Meaning, the more the foreign currency, as in the US Dollars, fluctuates at the lower rate, much as the financial flexibility is achievable. But not with the insurance policy firms which, by far, are not significantly relying on the foreign currency adjustment but with the volume of clients.
Somehow, the sudden devaluation of Philippine currency extends the opportunity for the insurer to enable more clients which specifically are migrant workers. Relevant to Graham’s and Harvey’s finding may be addressed to banks and financing institutions, like realties and the like, that employs the strictest and onerous corporate financial undertaking. Also relevant is the public financing of government agencies in which the hurdle rate of return in financing suffers most in the process of liquidating government assets.
In the Philippines’, an approximate 3-4 billion worth un-liquidated capital outlay is a big hurdle to the government’s asset privatization program (Philippines Department of Finance, 2006). That is why, the creation of Government-Owned and Controlled Corporations (GOCC’s) are mandated to cushion the debacle of growing interest rates as represented by cost of maintenance and recovery from depreciation. Meanwhile, government stockholding with leading private corporations, banks and individual business conglomerates are given the freehand to operationalize the fixed assets of the government.
Mostly are capital build up in unsuccessful project ventures that are sought to be as white elephant projects, like the Nuclear Power Plant that has long been maintained by the government and private caretaker to maintain the infrastructure and equipment from being rotten by time. With Graham’s and Harvey’s CFO’s attitude in capital budgeting and corporate decisions, it has proven that project investments must bear a critical and strict debt policy to ensure financial flexibility and determination to hurdle rates of return. Conclusions
The studies discussed and depicted in the overall presentation of the breadth section are all concluding on the importance of capital budgeting as a primary and basic tool of the old and young entrepreneurs. Most of the finding of the studies discussed were found relevant to the adoption of theories and applicable methods therein underlying in capital budgeting. It may be said that the theories on capital budgeting and other methods it consist are empirical and a beta for further studies, the basic implication of these findings addresses the need to acknowledge the parameters.
As the breadth section pointed out and intensely suggested the underlying parameters in capital budgeting, the Philippines form part of the empirical analogies to situate and locate where capital budgeting theories and its methods shall be derived and applicable. It can be noted that, the empirical theories, surveys and research are but a fraction of real life experiences of people that composes the situation. As Theodore Chen stated the empirical norm, the Philippines depict the analogy of the statement as capital budgeting itself is a general and common undertaking of the Filipino entrepreneurs.
Although the principles and methods in capital budgeting may unfit a particular segment of the Filipino entrepreneurs, it cannot be denied neither ignored that there is always a space for developing ideas and theories that the scholars in capital budgeting tried the inch of opportunities to look into the applicable means and practical solutions as the breadth section explore the tenets of possibilities and positivism regardless of foreign academicians that derived the empirical studies.