Capital budgeting projects that incorporate both investment and financing decision side effects can be properly analyzed by
A)adjusting the project's present value (APV).
B)adjusting the project's discount rate (WACC).
C)relying only on Modigliani-Miller Propositions I and II.
D)adjusting the project's present value (APV) and adjusting the project's discount rate (WACC).

Question

Quizplus · Accepted Answer

Both adjusting the project's present value (APV) and adjusting the project's discount rate (WACC) are necessary to properly analyze capital budgeting projects that incorporate both investment and financing decision side effects. Adjusting the APV takes into account the financing side effects, while adjusting the WACC reflects the change in risk caused by the financing decisions. Modigliani-Miller Propositions I and II only consider the impact of financing decisions on the cost of capital, and may not be applicable in all situations.

Capital Budgeting Projects That Incorporate Both Investment and Financing Decision