Capital Budgeting

BUS422 Capital Budgeting

  • Topics


    From certainty to uncertainty. Risk measures. Sensitivity analysis. Scenario analysis. Expected utility. Structuring decision. Decision trees. Value and information. Stochastic dynamic programming. Dominance. Portfolio perspective. Capital Asset Pricing Model. State preference model. Risk adjustment inside and outside of the market. Relevant risk. Use og market information. Option aspects at real investments. Capital rationing. Implication of capital structure on investment decisions. Investors  behavior in case of financial distress.

  • Learning outcome

    Learning outcome

    Knowledge - upon successful completion the student

    • Will have an extensive understanding of theories connected to evaluation and choice of real investment under uncertainty. This includes utility theory, capital asset pricing model, state preference model and option pricing theory
    • Be familiar with how optimization (linear and stochastic dynamic optimization) can be applied in investment decision making
    • Understand how capital rationing may affect investment decision making
    • Understand how capital structure may influence project values and create conflicts between debt and equity holders.

    Skill - upon successful completion the student shall be able to

    • Analyze projects where uncertainty is thoroughly evaluated, and quantified.
    • Evaluate uncertainty at project and portfolio level
    • Link project evaluation to capital market models (capital asset pricing model CAPM and state preference model SPM)
    • Decide which analysis level that is the most appropriate with respect to relevant risk and target group
    • Model and analyze investments when there are possibilities to adapt decisions as more information becomes available (using stochastic dynamic programming)
    • Identify, model, analyze and, to a great extent, determine the value of real options
    • Analyze investment choices when capital is limited
    • Explain how financing can affect project values and how financial distress can create conflict between debt and equity holders
    • Update on new research and knowledge within the field

    General competence - upon successful completion the student shall be able to

    • To ask critical questions and contribute in a constructive way to organizations working with real Investments.


ECTS Credits

Course responsible

Førsteamanuensis II Jens Bengtsson, Institutt for foretaksøkonomi