CFA Level 1 - Corporate Finance Questions and Answers Grade A+

Capital Budgeting process - -The process that companies use for making long-term investment decisions in projects. Important because: 1) a significant amount of capital is usually tied up in long-term projects so the success of these investments has a significant influence on the future prospects of the firm 2) The principles of capital budgeting can also be used in making other operating decisions (investment in working capital and M&A) 3) the valuation principles used in capital budgeting are also applied in security analysis and portfolio management 4) sound capital budgeting decisions maximize shareholder wealth -Capital Budgeting Steps - -1) idea generation - most important 2) analyzing individual project proposals - feasibility 3) create the firm-wide capital budget - fit firm's overall strategy 4) monitoring decisions and conducing a post-auditing - actual to expected, improve accuracy going forward, generate new ideas Capital Budgeting process - -The process that companies use for making long-term investment decisions in projects. Important because: 1) a significant amount of capital is usually tied up in long-term projects so the success of these investments has a significant influence on the future prospects of the firm 2) The principles of capital budgeting can also be used in making other operating decisions (investment in working capital and M&A) 3) the valuation principles used in capital budgeting are also applied in security analysis and portfolio management 4) sound capital budgeting decisions maximize shareholder wealth -Capital Budgeting Steps - -1) idea generation - most important 2) analyzing individual project proposals - feasibility 3) create the firm-wide capital budget - fit firm's overall strategy 4) monitoring decisions and conducing a post-auditing - actual to expected, improve accuracy going forward, generate new ideas