CHAPTER 4

Capital Budgeting and Enterprise Risk Management

It’s clearly a budget. It’s got a lot of numbers in it.

—George W. Bush

Introduction

Every company requires funds to operate, and as funds do not come free, the company has to source them in the least expensive manner. Funds either come from shareholders as equity or can be borrowed from banks or private lenders. In each case, the party putting up the funds expects a minimum return on its investment—banks and debt holders expect interest while shareholders expect dividends or capital appreciation. This expectation, from the company’s perspective, is the cost of obtaining these funds, that is, the cost of debt or the cost of equity as the case may be. The weighted average of these two ...

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