Most finance textbooks (See Benninga and Sarig, 1997, Brealey, Myers and Marcus, 1996, Copeland, Koller and Murrin, 1994, Damodaran, 1996, Gallagher and Andrew, 2000, Van Horne, 1998, Weston and Copeland, 1992) present the Weighted Average Cost of Capital WACC calculation as:WACC = d(1-T)D% eE%...

Investment decisions frequently require coordination across multiple divisions of a firm. This paper explores a class of capital budgeting mechanisms in which the divisions issue reports regarding the anticipated profitability of proposed projects. To hold the divisions accountable for their...

This paper studies the capital budgeting process in a setting where a manager is privately informed about the profitability of an investment project and enjoys non-pecuniary benefits of control (quot;empire benefitsquot;). I characterize the optimal required rate of return and show that a...

Variable costs need not be incurred unless a firm wants to produce goods or services; the opportunity to incur variable costs is therefore a real (European) option (McDonald and Siegel 1985). Moreover, fixed investments can usually be postponed; the ability to wait before investing is also a real...

A challenge faced by many firms is how to encourage managers to undertake risk levels that are compatible with overall firm performance goals. Incentive compensation that is tied to financial returns is a common control mechanism that is meant to induce managers to strive for higher returns...

In this teaching note I list some suggestions that might be useful to take into account when forecasting financial statements departing from historical data. The ideas presented in this note are the result of advising undergraduate and graduate students in the course Econ 195.96/295.96...

The discussion on value-based performance measures is centered around the concept of residual income. The main property of residual income is its connection to capital budgeting and the net-present-value-rule. This property is, however, not sufficient to guarantee strong goal congruence between...