Presidential address: Corporate finance and reality. Flashcards
According to the presidential address, what is the theory regarding firm decisions in corporate finance?
The theory suggests that firm decisions should be long-term, shareholder-focused, calibrated to different situations, responsive to challenges, and adaptable to changing circumstances.
How do CFOs’ actual practices in corporate finance differ from the theoretical expectations?
CFOs tend to exhibit short-term decision-making, mis-calibration in their forecasts, reliance on simple models, reluctance to change their views (stickiness), and a conservative approach. Additionally, they are now more focused on stakeholders rather than solely on shareholders.
What are some popular evaluation methods used by CFOs for investment decisions?
CFOs commonly use methods such as payback period, return on invested capital (ROIC), internal rate of return (IRR), and hurdle rates. However, they often do not fully consider the time value of money and may use NPV to support ideas rather than for evaluation purposes.
How do CFOs set hurdle rates for investment projects?
Hurdle rates are often set above the bond rates for the firm, reflecting a conservative approach. This approach aims to avoid failures by setting the hurdle rate higher than necessary and maintaining the original decision despite potential risks.
Why do most firms create multiple scenarios for planning purposes?
Most firms create multiple scenarios (good, base, bad) to account for different potential outcomes. However, they often focus more on the base case scenario, with the bad scenario being costly if it occurs. This conservative approach allows for greater flexibility in decision-making.
What traits do CFOs exhibit based on the survey discussed in the presidential address?
CFOs exhibit short-term decision-making, lack of calibration in forecasts, reliance on simple models, resistance to change (stickiness), conservatism, and a shift towards stakeholder-focused strategies.
