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Q&A 2

M

mtm

Member
Hi Everyone

I have a quick query about Q&A 2.8 and 2.10.

In the question of 2.8 (ii) an explanation for "capital budgeting" is asked for. The answer describes how this relates to the choice of "real" assets that the firm can invest in. In solution 2.10 (ii) on page 13 the last paragraph again raises the word "capital budgeting" but here it seems to refer to the amount of capital to be raised (and the capital structure problem referring to the mix of debt and equity required).

Several of these questions are testing 305 knowledge and the same problem springs up in my 305 notes. What must the word "capital budgeting" mean to me?

Thanks!
 
Capital budgeting

My feeling here is that this term has two meanings. In once sense capital bugeting is the overall area that the CFO is concerned with - buying real assets (which includes which ones to invest in and over what period to develop the projects / assets). Another meaning is the actual budgeting of the money available for investing in projects that the company is / or wants to become involved with. The second one sound similar but a little bit closer to what the treasurer does - plan issues of equity and debt.

In reality all these functions would have to work together anyway, but I would be happy with either of these definitions, and the Q&A looks OK to me (but I can see why you had a query).
 
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