Lien

INTERNATIONAL FINANCIAL MANAGEMENT
HARVARD BUSINESS SCHOOL

EC COURSE PAPER
DECEMBER 2005
“INTERNATIONAL CAPITAL BUDGETING IN PRACTICE”
MARC LIEN
70605147
INTERNATIONAL CAPITAL BUDGETING IN PRACTICE
INTRODUCTION
I wrote this International Financial Management Paper with four objectives in mind:
• To develop a survey instrument aimed at providing a rich description of the

practices of international corporate finance, allowing us to infer whether
corporate actions are consistent with academic theories.
• To construct a practical step-by-step approach to implementing such a survey
with the objectives of maximizing response rate and minimizing biases. This
approach would represent a plan of action to go from idea conception through
to publication.
• To find evidence from prior surveys supporting the theory that multi-national
corporations consistently over state their cost-of-capital.
• To improve my understanding of international corporate finance concepts and
to provide an opportunity to research and explore the challenges and tradeoffs
that financial executives face.
I have attempted to provide a real practical aid to the future undertaking of a survey
on international capital budgeting practices. To best achieve this aim, I structured
this report in the form of a chronological project plan. The major steps in the eight
point plan are:
1. Understand previous academic research
2. Define research objectives
3. Develop draft research instruments
4. Refine survey instrument
5. Select target companies
6. Construct delivery mechanism
7. Design marketing approach
8. Undertake research
Marc Lien International Financial Management Page 2

70605147 EC Course Paper
1. UNDERSTAND PREVIOUS ACADEMIC RESEARCH
Prior to engaging in a new piece of academic research, I felt it important to review

prior literature. Firstly, through a review of contemporary publications on a broad
range of International Financial Management topics, I felt better capable of creating
an informed survey instrument. Secondly, through a detailed critique of 20 previous
surveys on Capital Budgeting since 1970 (see Appendix A), I was able to both identify
best practice in survey construction and execution and, finally, this comprehensive
review of prior survey literature enabled me to identify where any gaps exist in terms
of academic understanding that could guide this piece of work.
My survey review highlights three main routes that prior research has followed:
1. Determine whether a gap exists between capital budgeting practices in the

field and those espoused by academics
A broad range of surveys going back to Mao (1970) [1]1 have looked to
understand and explain differences between the behavior of finance
practitioners and the normative view held by the academic world. This body
of research has captured three aspects of finance practice: how firms use
capital budgeting techniques, how they incorporate and manage risk and how
they determine their cost of capital.
Klammer [2], Gitman [4], Schall [5] all identify that managers in firms have a
preference to use simple payback techniques over more sophisticated DCF
ones although this trend is changing over time (Block [7]).
Later studies suggest the level of financial sophistication may be increasing in

some areas but not in others. Blazouske [10], for example, notes that although
firms use advanced capital budgeting techniques, few use any method of risk
adjustment or management science techniques.
Ryan (2002) [19] reviews past U.S surveys to see whether capital budgeting
practices have changed in Fortune 1,000 firms over time. She concludes: “it
appears the views of academics and senior managers of Fortune 1,000
companies on basic capital budgeting techniques are in stronger agreement
than ever before.”2
1
Numbers in square brackets ‘[ ]’ reference surveys in Appendix A
2
Ryan, P., “Capital Budgeting Practices of the Fortune 1000: How have things changed?”, Journal of
Business and Management, Vol. 8, No. 4, Winter 2002

The most thorough survey to date is by Campbell (2001) [16] which is unique
given its large sample size, broad scope and the availability of firm and
manager-specific characteristics.
2. Review whether capital budgeting procedures differ across industries,

countries or firms of different size
Given that the line of inquiry around managers trending towards normative
approaches had been exhausted, at least in a domestic context, researchers
turned their attention to seeing whether these trends were observable across
multiple dimensions.
Many started investigating differing practices across countries: Kester [9]

(Singapore), Blazouske [10] (Canada), Summers [11] (Europe and Asia),
Sandahl [12] (Sweden), Lazaridis [13] (Cyprus), Brounen [18] (UK,
Netherlands, France and Germany). One of the most interesting results from
these studies is the differing shareholder orientations of firm between
countries and the impact this has on capital management practices.
A second dimension was to look at whether sophisticated techniques were

equally prevalent across industries. Block (2005) [15] found that there were
significant differences in results relating to goal setting, determining the
required rate of return and accounting for the portfolio effect.
The impact of firms of different sizes was also explored. Brounen (2004) [18],
for example, found that smaller firms rely mostly on payback whilst larger
ones on NPV.
These differences in practices between countries, industries and firms of

varying size present opportunities for further research but also highlight areas
of potential bias in any future survey.
3. Investigate the challenges of capital budgeting for Multinational Corporations
In addition to comparing capital budgeting practices in a domestic setting

across different countries, some researchers have begun to explore capital
budgeting practices in multinational corporations (MNCs).
Oblak (1980) [6] identified that many MNCs use DCF methods and that they
adjust for risk in their evaluation of foreign investment opportunities. He

notes that MNCs have not significantly changed their way in which returns
from foreign projects are measured or the determination of the appropriate
discount rate. Block (1984) [7] followed up with a review of capital budgeting
methods in MNCs but did not explore the differences between domestic and
foreign project investment.
Goddard (1990) [14] dove deep into the political risk assessment process in
MNCs and found that the analysis was predominantly subjective and that
there was little integration of risk analysis into the formal capital budgeting
processes.
I would suggest that the paper that throws most light onto the international
capital budgeting processes is Block (2000) [17]. He explicitly examines the
extensions in theory and practice to domestic techniques in 146 multinational
corporations. He identifies a number of misapplications such as “applying
corporate wide weighted average cost of capital to foreign affiliate cash flows
rather than to cash flows actually remitted to the corporation.” Also that “risk
is frequently measured on a local project basis (in a foreign country) rather
than considering the portfolio effect on the total corporation.” He
summarized by saying: “Ultimately, it is shown that the survey respondents
hedge against the uncertainty of the procedures by adding a premium to the
weighted average cost of capital.”
Block’s paper is excellent in capturing the very latest practices in international

capital budgeting. He explores corporate policy, foreign investment and risk,
capital structure, cost of capital and operations considerations.

2. DEFINE RESEARCH OBJECTIVES
It is important to determine the particular objectives of this new piece of work before
progressing as the structure, content and approach are dependent on the objective. I
can see four potential directions that it can take:
1. Extend existing survey research. This could, for instance, take previous work
on multinational capital budgeting carried out with the help of US firms and
repeat and extend the exercise with South American, European and Asian
firms.
2. Perform targeted research through a series of in-depth interview alone, to
explore a particular hypothesis. For example, interview with the CFOs of 5
private multinational conglomerates and CFOs of 5 publicly traded
multinationals to see explore whether potential differences in shareholder
impact capital budgeting approaches.
3. Survey firms to cover a new aspect of international finance that has yet to be
investigated in the field. Given the broad nature of previous multinational
surveys, there is plenty of scope for a deeper dive into one or two aspects. For
instance, how to multinational firms go about assessing risks prior to agreeing
to an international investment project.
4. Survey firms to test a hypothesis. For example: firms overestimate the risks
involved in investing in international projects and this overestimation is
reflected in their capital budgeting analysis.

3. DEVELOP DRAFT RESEARCH INSTRUMENTS
Types of instrument
Researchers frequently use large sample analysis and clinical studies. Large sample
studies can increase confidence through their statistical power but are unable to gauge
answers to qualitative or probing questions, the research has to infer the answers.
Clinical studies offer excellent details and allow many of the biases discussed above to
be overcome but the small sample set only makes it impossible to generalize with any
confidence beyond the sample population.
The survey approach falls somewhere in between these two extremes in that a
moderately large sample of firms can often be attained (up to 350 in the case of
Campbell, 2001, [16]) at the same time a being able to ask for quantitative answers to
specific questions that externally available financial data does not provide.
Key issues with selecting survey method

Population issues
If the survey population is global multinational firms, it is important to compile a list
of these firms. Reviewing the various databases available at the Baker Library, I could
find no such ready made list. Step 5 details one approach that can be taken to compile
a list.
It is also unclear what is meant a multinational firm for the context of the survey.
One would need to decide the following in defining the population:
• Ownership – public or private
• Subsidiary definition – wholly owned, >50% or 0-50%
• Number of foreign subsidiaries – >0, arbitrary threshold, active international
investor - one or more investments in last 12 months or >x% of sales that are
foreign
• Industry – exclude or not investment and banking sectors
• Size – only top 500 firms on each stock exchange, range of small to large firms
given that capital budgeting practice varies along this dimension
• CAPEX spend – limit or not according survey to only firms that have had
growing CAPEX over last five years
• Growth – limit or not survey to firms that have been increasing shareholder
value
In addition to defining the survey, we need to determine who the recipient should be.
The research is focused on firm behavior yet it is unclear how closely related firm
behavior is to the expressed behavior of any one individual. Some people within the
firm may not have the knowledge required to answer the questions so the intended
recipient should be clearly defined. I would recommend targeting the CFO as that is

the one person in the firm who would have an overview of all the financial aspects be
it capital budgeting, capital structure, performance measurement etc. It is not quite as
obvious how to avoid the completion of the survey being deferred to someone
without the appropriate oversight. In any case, it will be a challenge to identify
name, address and recipient of the CFO of our MNC population.
Question issues
Some of the decisions around the specific questions on the survey include:
• Should questions be open-ended or structured? Structured questions may be in
the form of multiple choice; for example, “How do you determine the target
leverage for the project?” a. same as firm’s target leverage, b. debt capacity of
project, c. level of cash-on-hand for investment. Answers to multiple choice
questions should be mutually exclusive and collectively exhaustive so some
answers sets might require an ‘other’ category.
Multiple response questions could also provide an insight into how many
different tools or approaches a firm takes. For example, “Why does your
company invest abroad?” a. access to new markets b. access to raw materials c.
improved production efficiency d. development of new knowledge e. political
safety f. fear of losing a market g. “bandwagon” effect h. strong competition at
home i. diversification benefits.
Score assignments might also be useful to gain an idea of perceived relative
importance of factors. For example, “When considering an investment, how
concerned are you about each of the following political risks [0-6]?” a.
expropriation b. inconvertibility c. imposition of a new tax d. removal of
agreed subsidy e. implementation of new tariffs f. creating barriers to sourcing
g. unilateral changes to key contract provision h. ethnic strife. Forced ranking
could also be used.
• Complexity of questions is also important. A concern I have is that the survey
could ask a series of specific questions about risk management, cash flow
analysis etc. but some firms may not manage any risks or analyze cash flows
beyond payback period. This would reduce the useable data for some of the
questions.
• It is worth considering the use of screening questions to see whether the CFO
actually did respond to the survey or whether the task was delegated. For
instance, the anonymous survey could capture the age of the respondent. This
age could then be cross-checked with the age of the CFO as noted in CapitalIQ
or the like. Alternatively, we could ask the respondent for how many years
they have been with the firm. We could then use this as an extra check when
looking to explain outlier data.
• The likelihood of completion may be partly dependent on the type of question
asked. Is it, for example, worth excluding survey questions that require the

respondent to look information up. e.g. “What percentage of sales comes from
foreign subsidiaries?” I recommend circumventing this problem by converting
the answers to multiple choice: “0%, 1-25%, 26-50%, 51-75%, >75%”
Bias issues
Bias may creep into the survey items in a variety of ways.
• Ambiguity - Some of the financial terms and concepts may not be commonly
understood. For instance, I can see people interpreting the phrases, ‘sensitivity
analysis’ and ‘scenario analysis’ incorrectly. It would help to add a description
of these phrases: “Sensitivity analysis allows for the change in one input
variable at a time, such as sales or cost of capital, to see the change in NPV”
and “Scenario analysis allows for the change in more than one variable at a
time, including probabilities of such changes, to see the change in NPV”.
• Social desirability – Respondents are likely to want to look good in the eyes of
others if the survey is not anonymous. Making the survey anonymous,
however, will require a separate set of questions that capture key
characteristics of the company and the manager so that analysis can still be
performed. Even if using an anonymous instrument, it might be the case that
a respondent answers based on what they believe should be done or what they
think is done; both of which might be different from what is actually done.
• Non-response bias
Aggarwal (1980) discusses the limits of the usefulness of management science models
in more detail.
Developing Survey Questions

My original objective was to develop a completed survey which covered international
capital budgeting practices for multinational corporations and I worked on iterating a
series of potential questions. Subsequently, however, and near the completion of this
paper, I came across additional surveys by Block and Goddard (as described above)
which survey the exact elements that I had originally set out to do. My guiding
principal for this project was to provide useful data for implementation in the future
so I decided to not repeat the survey design based on my guess at what the research
might try and achieve.
Additionally, it became apparent that I am not the best judge of the final set of
questions to include in a survey – the effectiveness of the questions in eliciting a
usable response is. Theory on survey pre-testing (see step 4) recommends starting off
with a much larger set of questions than will end up in the final instrument.

I therefore decided that the most effective use of this element of the report was to
collate and structure all the questions from all available surveys so as to provide a
useful reference guide when creating a new survey for future research upon clarifying
the objective as describe in step 2.
Appendix B provides a categorized list of all the research questions asked in 10

available surveys, and their multiple-choice answer options cross-referenced to their
source.
The categories I used when reviewing the survey questions are:
• Firm characteristics (industry, financials, international)

• Management characteristics
• Corporate policy (capital budget, capital budgeting process, capital rationing)
• Management perceptions (purpose of firm, time horizon)
• Capital budgeting (required rate of return, project selection, techniques
• Determining the cost of capital (methods, risk adjustment, management
science techniques)
• International investments (risk analysis, capital structure, cost of capital,
operations, income measurement)
In addition to this survey question guide, I posit some questions of my own which I
believe have not been asked in any survey to date. My questions and recommended
multiple-response options (Appendix C) fall into two categories: Corporate strategy
and foreign investments, and international capital budgeting.

4. REFINE SURVEY INSTRUMENT
Pre-testing is absolutely critical to bring to light ambiguities and other sources of bias
and error. Converse and Presser (1986) argue that a minimum of two pretests are
necessary, with respondents similar to those who will be in the final sample. The first
pretest should have up to twice the number of items as the final, as one purpose is to
identify weaker items and drop them from the survey. Items may also be dropped if
the first pretest shows they exhibit too little variance to be modeled. The first pretest
will also have many more probe items that the final, and respondents may even be
told they are being given a pretest and their help solicited in refining the instrument.
Other purposes of the first pretest are to see if respondent interest is aroused, if
respondent attention can be maintained, if interviewers and respondents feel the
survey has a natural flow, and if interviewers experience problems such as need to
repeat questions, need to correct misinterpretations of questions, need to handle
volunteered information, sections where the respondents wanted to say more, or
questions which seemed sensitive.
The first pretest results, hopefully, in a much-changed, finished instrument. The

second pretest is used simply for polishing, trimming, rearranging, and other
refinements, but not adding new dimensions or making major substantive changes in
the survey.
A natural test-base for the survey would be the MBA student body. Students could
complete the survey and note the time it took them, where they felt questions were
ambiguous and suggest other improvements.
The survey should also be shown to researchers in the finance department to gain
their input along with marketing research experts go review the design and
execution. Again, the objective here is to minimize bias and maximize the response
rate.

5. SELECT TARGET COMPANIES
The following steps can be taken to select target companies, extract relevant
information about the recipient and generate a dataset that can be used for further
analysis:
1. Decide desired universe of companies as described in step 3. e.g. Only large-
cap public companies that operate in more than ten foreign geographies.
Dataset should have equal population of 300 firms headquartered in each of
the US, Europe and Asia and exclude investment firms.
2. Use CapitalIQ – available through the Baker Library Resources – to create a

‘screen’ that matches the population you desire. Here is an example of a
CapitalIQ screen:
1 Professional Job Function: Chief Financial Officer
2 Geographic Location: United States and Canada (Primary)
Investment Type: NOT (Venture Capital Investing OR Private Equity Investing OR Incubation OR
3 Pensions/Savings Fund(s) OR Endowment Fund(s) OR Foundation Fund(s) OR Hedge Fund(s) OR Investor in Public
Equity OR Principal Investing OR Mezzanine Investing OR Investor in Principal Investment Funds)
4 Market Capitalization ($mm) [Latest]: is greater than 5000
5 Industry Classification: NOT (Financials)
3. Cross-reference the filtered CapitalIQ companies with those in the ORBIS

dataset – also available through the Baker Library Resources – to remove
companies that do not meet the Multi-National Corporation criteria. This can
not be done directly using CapitalIQ.
4. Create a CapitalIQ report that includes the CFO (or other executive) in the
Professional Job Function field.
5. Run the final CapitalIQ screen and by selecting the CFO of each company, you
are able to download a v-card (electronic business card) which can then be
imported into a new Microsoft Outlook contact folder.
6. Export the Microsoft Outlook contact folder to a Microsoft Excel document for
reference or use it directly for a mail-merge of the survey and cover letter to
the CFOs. Appendix D shows a list, created using this method, of the names
and addresses of the CFOs of the Top 100 North American companies.

CONSTRUCT DELIVERY MECHANISM
Once the survey design has been settled on, various means of delivering and receiving
back the survey to respondents should be developed.
Outbound survey channels

1. Include a paper copy of the survey with a cover letter to the CFO. The survey
should not be stamped so as to make it easy to return the document by fax. A
stamped-addressed envelope should also be included along with a final
checklist of things the respondent should do before returning the material.
2. The survey and cover letter could be faxed to recipients. The most effective
way of utilizing this channel is to use on online service which will
automatically fax all the documents to the list of fax numbers you provide it.
Service providers include: www.myfax.com, www.efax.com,
www.rapidfax.com, www.clickfax.com
3. Email a link to an online survey to the CFOs
4. Telephone the CFO and spend 15 minutes completing the survey over the
phone.
Inbound survey channels

1. Stamped addressed envelopes for those completing the survey by hand and
returning it by post
2. Provide a dedicated fax number for completed surveys. This fax number
should be an ‘internet fax number’ (provided by one of the companies
mentioned above). This will allow for easy collation of all returned faxes.
3. A web based survey tool should be created. There are several companies that
provide this service including: www.questionpro.com,
www.websurveyor.com, www.surveysystem.com

7. DESIGN MARKETING APPROACH
The following are some ideas on how to maximize the uptake of the survey:
• Identify Harvard Business School MBA and AMP alumni who work in the
finance department of their firm or are CFOs and have them personally
request the CFO to complete the document.
• Present at a CFO forum and have surveys completed there and then.
• Create a CFO forum and have registrants complete the survey as part of the
registration.
• Partner with a consulting Firm who may have access to senior management of
US and international firms
• Mass email members of the Finance Executives International network
• Send a letter to each CFO in the targeted company database.
• Phone the CFO of each company and ask for commitment to completing the
questionnaire. Offer them the alternative to complete the survey over the
phone or to have an email with link to website sent to them.
• Offer $500 to three randomly selected participants
• Offer $50 for the completion of each survey
• Promise advanced copy of results
• Have 10 MBA students phone round and follow up non-respondents. Use
native speakers.
• Resend and refax survey to non-respondents two weeks after initial mailing

8. UNDERTAKE RESEARCH
Once the survey has been deployed and the results have been collated, we would
want to drive for publication of the results in the academic community. One
potential area for exploration is the extent to which imbalances in capital budgeting
processes lead to a massive unnecessary shortfall in the flow of funds from rich
countries to poor. One element of that argument is that firms overstate their cost of
capital. It is on this topic that I explore further below.
Firms consistently overestimate the cost of capital for international investments

leaving wealth-creating opportunities unexploited
Positive NPV projects create wealth for shareholders but setting the required rate of
return above the true cost-of-capital will result in positive NPV projects being
bypassed
One of the foundations of capital budgeting theory is the determination of equity

returns required by sponsors to invest in a particular project as opposed to them
investing in other projects. The simplest criterion to apply is that a given project
should more than cover the opportunity cost of capital committed to the investment –
the Net Present Value rule. When the present value of expected future cash flows
exceeds the investment’s costs, the project is unambiguously value creating.
The Capital Asset Pricing Model (CAPM) is commonly used to determine required
rate of return used in the present value calculation and is based upon two principles:
1) risk and return are positively correlated so investments in a riskier project will
require a higher return, and 2) so long as the returns on different assets are less than
perfectly correlated, investors can eliminate some risks easily and costlessly by
holding a diversified portfolio of risky assets. Only risks which can not be eliminated
are priced into the required rate of return.
Managers unfortunately engage in shareholder value destruction by executing

projects that do not exceed their cost of capital (are NPV negative). Less talked about
but equally value destroying are those projects which do have a positive NPV but are
not implemented. This will happen if management explicitly excludes some positive
NPV projects as a result of setting an investment decision hurdle rate above the true
cost of capital. Value destruction also occurs when management miscalculates too
high a cost of capital and applies this to project cash flows leading to an erroneously
negative NPV.

There is evidence that suggest that firms do not exclusively hold a shareholder
orientation and that they require excessive rates of return
The goal of the firm, from a financial perspective, is to maximize shareholder wealth.
There is no reason to believe that firms that do not subscribe to this view would seek
to adhere to the NPV criterion given that it is not aligned with their goals.
Disturbingly, not all firms see maximizing shareholder wealth as a primary objective.
Stanley and Block study3 of the Fortune 1000 companies in the 1980’s found the most
frequently stated objective of management was to maximize return on equity (29%)
followed by maximizing growth in earnings per share (26%). Maximize stockholder
wealth was third at 21%. Even in Block’s most recent study4, 28% of Fortune 1,000
companies voted for growth in earnings per share. The same study found that in
some industries, the misaligned goals were even starker with 67% of retail firms
choosing growth in earnings per share as the primary objective of the firm.
The objective of maximizing shareholder wealth also differs across countries.

Brounen, Jong and Koedijk illustrate5 that practioners in Germany and France only
rated this corporate goal as 1.7 and 1.9 out of four (0-not important, 4-very important)
whereas companies in the UK and Netherlands scored greater than three on average.
Arnold and Hatzopoulos asked in their survey6, “what are the cut off points used to
evaluate the viability of major capital investments?” They found that the average
payback hurdle was set remarkably low at 2-4 years whilst the NPV modal range was
high at 11-15%. Pike in his 1986 study7, found that 27% of firms were using an NPV
hurdle rate of 20-24%. Cost of capital hurdle rates as high as this are significantly
above the long-term market requirement and these firms have invariably destroyed
value by passing up projects that would have been NPV positive had an accurate
discount rate been applied.
3
Stanley, M.T. and S.B. Block, “A survey of multinational capital budgeting,” Financial Review, Vol. 19,
March 1984, pp. 36-51
4
Block, S.B. “Are there differences in capital budgeting procedures between industries? An empirical
study”, The Engineering Economist, Vol. 50, 2005, pp.55-67
5
Brounen, D, Jong, A, Koedijk, K, “Corporate Finance in Europe: Confronting Theory with Practice”,
Financial Management, Winter 2004
6
Arnold, G., Hatzopoulos, P.D., “The Theory Practice Gap in Capital Budgeting: Evidence from the
United Kingdom”
7
Pike, R.H., “An Empirical Study of the Adoption of Sophisitcated Capital Budgeting Practices and
Decision Making Effectiveness”, Accounting and Business Research, Vol. 18, No. 72, pp. 341-51

Managers have a tendency to overstate the required rate of return on domestic

projects
Several viable explanations enlighten us to why managers consistently overstate the

appropriate cost of capital:
Problems with the NPV method cause project valuations to be understated

The NPV approach, lauded in most academic textbooks8, is “accept project if and only
if its NPV is positive”. This approach does not incorporate the value of managerial
flexibility. For example, if a company develops a new product, it may invest to
expand its production capability or if the cost of a critical part skyrockets, it may
choose to scale back production or terminate the venture. Traditional NPV analysis
approaches fail to capture the value associated with this managerial flexibility.
Koller, Goedhart and Wessels9 note that the value of flexibility is greatest when
uncertainty is high and there is room for managers to react to new information. The
authors recommend analyzing at least four types of managerial options: the option to
defer investment, abandonment option, follow-on options and the option to adjust
production. The existence of one of more of these options will increase the NPV of a
project and, for borderline projects, could sway a decision from ‘reject’ to ‘accept’.
Practitioners inconsistently incorporate real-options with only 25% of CFO’s
indicating the use of the technique in Campbell’s 2000 survey10.
Top management’s incentive to scale back the optimism of project sponsors

Poterba and Summers11 in their 1995 paper note that some managers “may set hurdle
rates above their required returns as a way to correct for overly optimistic cash flow
projections in projects that they are asked to consider.” This approach is flawed;
managers should instead scale back the absolute values of the cash flow. By
increasing the hurdle rate, managers are inadvertently shortening the corporate
investment time horizons due to the discount rate method over-adjusting distant cash
flows.
8
Zimmerman, J., Accounting for Decision Making and Control, 1985, pp.119
9
Koller, T., Goedhart, M., Wessels, D., “Valuation: Measuring and Managing the Value of Companies”,
McKinsey & Company, Fourth Edition, 2005
10
Graham, J., Campbell, H.R., “How do CEOs make Capital Budgeting and Capital Structure Decisions?”,
The Journal of Applied Corporate Finance, Vol. 15, No. 1, 2002
11
Poterba, J., Summers, L., “A CEO survey of U.S. Companies’ Time Horizons and Hurdle Rates”, Sloan
Management Review, Fall 1995

When Block12 asked top management whether the “true rate of return” that they
require is higher than the computed rate using the weighted average cost of capital,
74% answered in the affirmative. Again, this is a suboptimal approach since the
WACC is intended to incorporate all the uncertainty associated with the investment.
Additionally, Antle and Eppen13 pointed out that the combination of asymmetric
information between managers and an incentive system within a hierarchy that
rewards managers for amassing control over corporate resources can induce the
imposition of a countervailing force, that is high hurdle rates, to reduce the tendency
to over invest. Senior managers apparently have a tendency to overcompensate by
demanding excessive discount rates.
These tendencies are compounded by managers overestimating the incremental risk-

exposure associated with international investments
Academics14 and practioners frequently perceive that foreign investments have the
greatest risk exposure of any capital allocation opportunity. The explanation given is
often that there are additional risk effects that need to be incorporated into the
analysis. Block’s 2000 study indicates that 69% of multi-national corporations
surveyed think that international investments increase the risk exposure of the firm.
38% saw business economic risk as their predominant concern with international
projects. 27% indicated currency risk and 20% selected expropriation risk.
Shapiro15 makes a strong case for the contrary: “To the extent that foreign cash flows
are not perfectly correlated with those of domestic investments, the total risk
(systematic and unsystematic) associated with variations of cash flows appears to be
reduced, not increased by international investment.”
Block16 supports this argument and says that “the portfolio’s effect argument becomes
even more compelling when investments are made in less developed countries.
While the inherent risk may be larger in the emerging markets of Latin America,
12
Block, S., “Integrating Traditional Capital Budgeting Concepts into an International Decision-Making
Environment”, The Engineering Economist, 2000
13
Antle, R., Eppen, G., “Capital Rationing and Organizational Slack in Capital Rationing”, Management
Science, Vol. 31, No. 2, pp.163-174
14
For example: Ross, S.A., Westerfield, R., Jaffe, J., Corporate Finance, 5th Edition, Irwin/McGraw-Hill,
Burr Ridge, 1999
15
Shapiro, A.C., Multinational Financial Management, Ally and Bacon, Boston, 1997
16
Block, S., “Integrating Traditional Capital Budgeting Concepts into an International Decision-Making
Environment”, The Engineering Economist, 2000

Asia, or Africa, the portfolio risk reduction benefits are likely to be greater because of
low or even negative correlation between these countries and the United States.”
Beyond this portfolio effect, there are two additional reasons that support the idea the
MNCs consistently overstate the cost-of-capital associated with international
investments
The first relates to how adjustments are made to the analysis to incorporate the
additional risk. There are two ways of making this adjustment, one is to adjust the
discount rate upwards (81% of the managers17) and the other is the certainty
equivalent method where yearly cashflows are penalized for lack of certainty. When
the adjusted discount rate method is used, only the systematic risk should demand a
higher rate of return. “Unsystematic risk such as exchange rate exposure or
imposition of a new tariff [or expropriation] can be diversified away and does not
merit a higher hurdle rate.”18 This in itself is not of issue, what is, is the fact that less
than 15% of respondents19 realize the distinction between systematic and
unsystematic risk.
Secondly, managers tend to use subjective perceptions of risk to adjust the discount
rate. Oblak20 found that 40% of MNC managers subjectively adjust the discount rate
to take account of the perceived additional risks that come with international, versus
domestic, investment projects. Block21 found the figure to be closer to 80%. Without
a clear understanding and delineation between the systematic and unsystematic risks,
hurdle rates will consistently be set too high and value-creating opportunities passed
over.
17
Ibid.
18
Ibid.
19
Ibid.
20
Oblak, D., Helm, R., “Survey and Analysis of Capital Budgeting Methods Used by Multinationals”,
Financial Management, Winter 1980
21
Ibid.

APPENDIX A
RESEARCH MAJOR TOPICS INTERNATIONAL

ARTICLE STUDY METHODOLOGY
OBJECTIVES FINDINGS COVERED CONTENT
1 Survey of Capital Budgeting: Theory and Practice , Compares theory to practice for 8 small Managers were reluctant to use NPV/IRR Objectives of financial management None Day long management
Mao, James C.T., J of Finance, vol. 25, 1970, 349- companies Perceptions of risk interviews
360 Incorporating risk into analysis
2 Empirical Evidence of the Adoption of Investigate changing capital budgeting DCF gaining over time Sector analysis None Survey of 369 firms (184
Sophisticated Capital practices in industry to see if they kept Some projects did not undergo profitability analysis, e.g., Capital budgeting techniques responses) with minimum
Budgeting Techniques , Klammer T., Journal of up with evolving theory safety Risk analysis CAPEX of $1m for each of 5
Business, 45, July 1972 years
3 Capital Budgeting Practices: A Survey , Fremgen, J, Determine the incidences and causes of not available 3 stages of capital budgeting process None Survey
Management Accounting, May 1973 capital rationing and observe Capital budgeting techniques
management practices
4 Survey of Capital Budgeting Techniques Used by Capital budgeting procedures and Increasing use of more sophisticated tools (NPV/IRR) Project decision criteria None Survey of 268 high stock
Major U.S. Firms , Gitman, LJ; Forrester, JR, techniques, capital rationing, and 50% operate in capital rationing environments Departmental responsibilities price growth, high CAPEX
Financial Management, 1977 handling of risk Capital budgeting process companies (103 responses)
Capital budgeting techniques
5 Survey and Analysis of Capital Budgeting Testing hypothesis that firms were Risk analysis is also becoming more sophisticated, after-tax When techniques used None Survey of 424 large firms
Methods, Schall, LD; Sundem, GL; Geijsbeek, WR, getting smarter through use of more weighted average cost of capital being most popular What techniques are used (189 responses).
J of Finance, Mar 1978 sophisticated techniques Pre/post tax cashflow and cost of capital
Project risk categories
6 Survey and Analysis of Capital Budgeting Investigate capital budgeting techniques 24% of project ideas generated by subsidiaries. 5% (3) Capital budgeting both domestically and Substantial comparisons Surveys sent to CFOs of 226
Methods Used by Multinationals , Oblak, D, Helm, and procedures used to estimate project companies indicated different weights used when evaluating internationally for MNC between domestic and of Fortune 500 firms (58
R, Financial Management, Winter 1980 returns, risk and the required rate of foreign and domestic projects. Very high acceptance rate for Income measurement from subsidiaries foreign firms. All companies responses). Firms had
return projects. 54% use Cash Flow as measure of income from Risk adjustment had headquarters in the US. subsidiaries in over 12
subsidiaries. 50% firms required rate of return is the same for countries.
domestic and international projects, of those that do not, 44%
use local cost of capital and 40% use a subjective measure.
Risk adjustment in general was generally performed through
subjective means. Firms tended to consider foreign project risk
- forex (67%), inflation (73%), political (73%)
7 A Survey of Multinational Capital Budgeting , Investigation of the sophistication of Firms moving towards a more normative approach reducing Financial objectives of firm U.S. multi-national firms Survey of 339 of Fortune
Stanley, MT; Block, SB, The Financial Review, U.S. multinational firm capital gap between theory and practice Budgeting evaluation techniques only 1000 firms (121 responses)
1984 budgeting processes Use of WACC No comparison between 14-item, 2 page survey
Risk-adjustment techniques domestic and international mailed to CFOs
Initiation and approval of projects projects
Centralization of decision process No assessment of
international specific risks
Marc Lien International Financial Management

70605147 EC Course Paper Appendix A: Page 1
APPENDIX A

8 Capital Budgeting at Twelve Large Manufacturers , Investigate whether capital rationing is a Smaller projects are subject to higher hurdle rates Decision making at different levels in None Sample of 400 energy
Ross, M, Financial Management, Winter 1986 rational scheme for focusing effort on Decision making is different between discretionary and firm conservation projects at 12
most profitable opportunities mandatory projects; Simpler tools used lower down firm; Mandatory vs discretionary projects large manufacturing firms. 1-
Rationed firms have much higher hurdle rates than those that Capital budgeting techniques 3 days of interviews at each
do not; importance of asking how capital budgeting practices Factors affecting hurdle rate
differ at the plant, division, investment committee, and CEO
and Board levels
9 Capital budgeting practices of listed firms in Investigate capital budgeting practices of In contrast to US and Australian companies, IRR and payback Capital budgeting techniques None although domestic Survey of 211 listed
Singapore, Kester G, Chong, T, Singapore Singaporean Firms are perceived to be equally important. Sophisticated risk Risk analysis setting is Singapore. Some Singaporean firms operating
Management Review, Jan. 1998 analysis techniques were seldom used. Only 17% used CAPM Capital rationing comparison made between in Singapore (54 responses)
to determine firm's WACC, none used CAPM to determine results with those typical for
project WACC. Little evidence of capital rationing. Most US firms
analysis performed after tax
10 Capital Budgeting Practices in Corporate Canada , Understand capital budgeting practices Most companies used advanced capital budgeting techniques Capital budgeting techniques None although domestic 500 large Canadian
Blazouske, J., Carlin I, Kim S, CMA, March 1988 in Canada but few used any method of risk adjustment. Very few used Risk adjustment techniques setting is Canada companies (208 responses)
management science techniques beyond sensitivity analysis Management science tools
11 A CEO Survey of U.S. Companies’ Investigate Fortune 1000 firm hurdle Hurdle rates tend to be higher than cost of capital. US CEOs Hurdle rate None Survey of Fortune 1000 CEOs
Time Horizons and Hurdle Rates , Poterba, J, rates and time horizons believed they had shorter time horizons than in Europe and Cost of capital (268 responses). 68 unusable
Summers, L., Sloan Management Review, 1995 Asia. Time horizons since no way of identifying
Government policy the firm. Four months
between mailing and follow-
up
12 Capital budgeting methods among Sweden's Present general description of the state Public sector companies are most frequent users of DCF Capital budgeting techniques None although domestic Survey of 528 of large
largest groups of companies , Sandahl, G, Sjogren S, of the art of capital budgeting methods methods. The payback method is the most used in all Risk analysis setting is Sweden Swedish companies (110
International Journal of Production Economics, used by Swedish corporations industries; also matters size of company. Tradition is an Sector analysis responses)
April 2003 important factor explaining the choice of method..
Manufacturing companies tend to use DCF more.
13 Capital Budgeting Practices: A Survey in the Investigate methods used by Cypriot Over 50% of firms used simplified evaluation technique. 37% Capital budgeting techniques None although domestic 100 Cypriot companies
Firms in Cyprus , Lazaridis T, Journal of Small companies to evaluate investments, and used payback period. Only 9% use IRR Risk analysis setting is Greece surveyed (56 responses) 32
Business Management, 2004 approach to handling estimation questions in 5 sections
problems

APPENDIX A

14 Political Risk in International Capital Budgeting , Determine how companies evaluate When firms undertake political risk analysis, it is typically MNCs None although domestic Interview with 20 UK
Goddard, S, Managerial Finance, Vol 16, 1990 political risk subjective, rather than formal and systematic; Few Political risk setting is UK multinationals
multinationals have an employee responsible for examining Risk adjustment techniques
political risk or seeking to formally integrate political risk
with the decision process; Little use is made of external
advisers to aid risk assessment; Decisions are often made on
"go-no go" basis without determining if expected returns are
high enough to compensate for the risk
15 Are there Differences in Capital Budgeting Investigate whether all industries have Significant differences in results relating to goal setting, Corporate goal-setting None Survey of Fortune 1000
Procedures Between Industries? An Empirical become equally sophisticated in using determining required rate of return and utilizing portfolio Selection of hurdle rate companies (302 responses)
Study, Block, S, The Engineering Economist, Vol. capital budgeting techniques effect Divisional cost of capital
50, 2005 Risk adjustment
Portfolio effect
16 The theory and practice of corporate finance: Investigate management practice Large firms rely heavily on present value techniques and the Cost of capital None Survey of 392 CFOs
Evidence from the field , Graham, J, Campbell, H, relating to the cost of capital, capital capital asset pricing model, while small firms are relatively Capital budgeting techniques
Journal of Financial Economics, June 2001 budgeting, and capital structure likely to use the payback criterion. A surprising number of Risk assessment
firms use firm risk rather than project risk in evaluating new
investments. This study finds some support for the pecking-
order and trade-off capital structure hypotheses.
17 Integrating Traditional Capital Budgeting Analyze capital budgeting processes of There are a number of misapplications such as applying MNCs Substantial Survey of 483 Fortune 1000
Concepts Into an International Decision-Making multinationals in light of current corporate-wide WACC to foreign affiliate cash flow rather Capital budgeting techniques firms (146 responses). All
Environment, Block, S, The Engineering financial theory. Examine extensions of than to cash flows remitted to the corporation. Also, risk is Risk adjustment techniques firms had to operate in more
Economist, 2000 domestic practices into international frequently measured on a local project basis rather than Project cash flows than six countries.
area. considering the portfolio effect to the total corporation. Portfolio effects
Firms hedge against uncertainty by adding a premium to
WACC
18 Corporate Finance in Europe: Confronting Theory Understand how Professionals deal with Small firms rely mostly on payback whilst large firms use Capital budgeting Differences in practice Sampled 6,500 companies
with Practice , Brounen, D, Jong, A, Koedijk, K, different dilemmas within modern NPV. In capital structure policy, financial flexibility appears Cost of capital between firms operating (313 responses)
Financial Management, Winter 2004 financial management and to what to be the most important factor in determining the amount of Capital structure domestically but located in
extent theoretical concepts have been corporate debt. Corporate finance practice seems to be CAPM UK, Netherlands, Germany
adopted in practice influenced mostly by firm size and shareholder orientation International differences and France
but less so by state.
19 Capital Budgeting Practices of the Fortune 1000: Explore whether there really is a gap Management sees NPV as preferred capital budgeting tool and Capital budgeting None Survey of Fortune 1000 firms
How Have Things Changed? , Ryan, P, Journal of between firms use of sophisticated see both NPV and IRR as superior to other tools. (120 responses)
Business and Management, Winter 2002 capital budgeting techniques and those
that do not
20 The Theory-Practice Gap in Capital Budgeting: Collect information on UK firms' capital UK corporations have increasingly adopted textbook financial Capital budgeting None although domestic Survey of 300 of Times 1000
Evidence from the United Kingdom , Arnold, G, investment decision making processes analyses - only a small minority do not use DCF, formal risk Risk adjustment techniques setting is UK top UK companies. (145
Hatzopoulos, P analysis, appropriate inflation adjustment, and post-auditing Inflation adjustments replies, 96 useable)
Post-audting

APPENDIX B
QUESTION ANSWERS APPENDIX A REF.
FIRM CHARACTERISTICS
INDUSTRY
Which industry are you in Construction, hotel, manufacturing, property, retail/wholesale, finance, multiple lines of business 9
Which industry does your firm operate in? Agricultural and related, logging & forestry, mining quarry & oil well, manufacturing, 10
transportation & storage, communication & other utility, wholesale trade, retail trade, other
Which industry do you operate in? Building construction materials, food industry, … [data not available] 13
Which industry is your firm in? Manufacturing; transportation, communication and utilities; finance, insurance and real estate; 11
wholesale and retail trade; services; construction; mining
Which industry are you in? 2 digit SIC code 2
Which industry does your firm operate in? Energy, Manufacturing, Finance, Utilities, Technology, Retail, Healthcare, Transportation, Other 15
Which industry is your firm in? Retail and wholesale; mining, construction; manufacturing; transport/energy; 16
communications/media; bank/finance/insurance; tech (software/biotech/etc)
FINANCIALS
What is your annual sales volume? $billion: 1-2; 2-3; 3-4; 4-6; 6-10; 10-15; 15-25; >25 17
What is the FY200x turnover of your firm, profit after taxes, net income? 13
What is the end of FY200x book value of assets, equity capital, short and long term liabilities? 13
P/E ratio; current ratio; % change in EPS; total equity return; beta; Tobin's q; stock turnover Independently identified given survey was not anonymous 11
rate; fraction of institutional holding
What are the average operating assets over prior 8 years? Independently identified. Used to measure size of the firm 2
What is the yearly depreciation (a) and yearly operating assets (b) over prior 8 years? (a/b - high Independently identified. Used to capital intensity 2
ratio indicates capital intensive firm)
What was your firm's total revenue in FY2003? 15
What was your firm's total assets in FY2003? 15
What was your firm's ratio of fixed-to-total assets in FY2003? 15
What was your firm's ratio of net income to stockholders equity at year end FY2003 15
What is your firm's approximate (trailing) Price/Earnings ratio over the past 3 years? P/E ratio 16
What is the credit rating for your firm's debt? Rating; not rated 16
What is your firm's approximate long-term debt/total assets ratio? 16
What is your sales revenue? <25m; 25-99m; 100-499m; 500-999m; 1-5bn; >5bn 16
What are the return and risk characteristics of domestic and foreign projects over the last 5 % return on domestic and foreign projects; higher, same, lower variation in returns from foreign 6
years? vs domestic projects
If all options were exercised, what percent of common stock would be owned by the top three <5%;5-10%;10-20%; >20% 16
officers?
What fraction of your R&D budget are devoted to projects that won't pay off in the next 5 years? 0-10%; 10-30%; 30-50%; 50-70%; 70-100% 11
INTERNATIONAL
What percentage of sales are sourced from foreign affiliates? % 6
What % are foreign sales as a % of your total sales? 0-10%; 10-20…>70% 17
What proportion of sales are foreign sales? 0%; 1-24%; 25-49%; >50% 16
Do you operate internationally? Yes, No 13
How many foreign countries does your firm operate in? 6-9; 10-14; 15-19; 20-24; 25-29; 30-34; 34-39; >50 17
How many foreign countries are there in which your firm has operating wholly owned 6
subsidiaries?
MISC
How many employees in your firm? [data not available] 13
How long has your firm be in operation? 13
Where is your company located? Canadian provinces 10
What is the ownership status of your firm? Public; private 16

Are you a regulated utility? Yes, no 16

70605147 EC Course Paper Appendix B: Page 1
APPENDIX B
MANAGEMENT CHARACTERISTICS
GENERAL
Who completed the survey? Financial manager, … [data not available] 13
What position are you in the finance department? Treasurer, VP finance, CFO, junior financial officers 6
What is the CEO's tenure? 11
Does the CEO have a finance background? Yes; No 11
Does the CEO have an MBA? Yes; No 11
What it the CEO's education? Undergraduate; MBA; non-MBA Masters 16
How old is the CEO? <40; 40-49; 50-59; >60 16
What is the CEO's tenure (time in current job)? <4 years; 4-9 years; >9 years 16
CORPORATE POLICY
CAPITAL BUDGET
What is the average size of your company's annual capital budget? <$1m, 1-2.5, 2.5-5, 5-10, 10-25, 25-100, >100 9
What is your annual capital budget? 6
What is your annual capital budget? <1m; 1-50m; 50-100m; 100-200m; >200m 20
Is a long-range capital budget formally prepared? Yes; No 2
What proportion of projects require formal capital budgeting analysis? % 6
When are outline capital budgets prepared for? 1, 2, 3, 4, >4 years ahead 20
When are detailed capital budgets prepared for? 1, 2, 3, 4, >4 years ahead 20
Is there at least one member of your staff assigned full time to capital budgeting? Yes; No 2
CAPITAL BUDGETING PROCESS

Are standard forms generally used for budget and appropriation requests? Yes; No 2
Does your firm have a formal method of considering risk? Yes; No 2
Does your company require proposals for capital investment to meet minimum standards of Most; some; few 2
profitability?
Are alternatives to major investment proposals specifically searched for and considered? Yes; No 2
What is the approximate (based on $ value) of capital projects for which your firm makes and 0-25; 25-50; 50-75; 75-100; 100% 2
estimate of profit contribution?
Does your firm carry out post-audits of major projects? Yes; No 2
CAPITAL RATIONING
Does your firm place a limit on the size of its annual capital budget? Yes, No 9
Are there specific capital expenditure ceilings placed on operating units which sometimes lead to Yes; no; Investment decisions important for the whole group and require central control; 20
the rejection of viable projects? management wants to control cash, because of a shortage of funds; management wants to
control areas of activity and mix of products; shortage of other key resources; other
MANAGEMENT PERCEPTIONS
PURPOSE OF FIRM
What is the primary goal of your firm? Stockholder wealth maximization, growth in earnings per share, return on stockholders equity 15
Which goals are important to your firm? Maximize profits; Maximize sustainable growth; market position, service, quality; Cost control, cfeu
productivity, efficiency; Continuity; maximize shareholder wealth; maximize dividends; optimize
leverage [0 - not important -> 4 - very important]
What does management view the primary goal of the firm to be? Maximize return on assets; maximize growth in revenue; maximize growth in EPS; maximize 17
stockholder wealth
TIME HORIZON
Do you regard your firm as undervalued by the market? And vs 5 years ago? Yes; No 11
How often does the CEO meet with money managers? x per week 11
How much would you increase your long-term investments if the stock market properly valued % increase 11
those investments?
Have you ever decided not to undertake a profitable investment opportunity because the stock Frequently, occasionally, never 11
market might penalize the decision?
How does your firm's planning horizon compare with your European (and Asian) competitors? Longer -> shorter 11
How do various (17 questions asked) public policy issues affect corporate hurdle rates and time Would significantly lengthen horizons -> would significantly shorten horizons 11
horizons? [economic, financial, policy environment]
In valuing your firm in the marketplace, what earning figure(s) do you believe investors primarily Next quarter's earnings; next year's earnings; outlook for next 5 years; outlook beyond the next 17
emphasize? 5 years

APPENDIX B
CAPITAL BUDGETING
REQUIRED RATE RETURN
What is the normal required rate of return equal to? the rate of return the corporation has earned in the past; the desired growth rate of the firm; the 17
WACC
Is the true rate of return required by management higher than the computed normal rate of Yes; no 17
return of the firm?
How important are hurdle rates in your capital budgeting process? Very important; somewhat important; unimportant 11
What cut-off points are used to evaluate the viability of a major capital investment? Payback period - 0-2, 2-4, 4-6, 6-10 years 20
ARR (ROCE) - 11-15%, 16-20%, 21-30%, 31%
IRR/NPV - 0-10%; 11-15%; 16-20%; 21-30%; >30%
What is your firm's average hurdle rate? 11
PROJECT SELECTION
What percentage of projects pass through your capital budgeting process? All, some, none 13
How do you decide which projects need to be evaluated using capital budgeting decision process? Depending on budgetary cost restrictions, [data not available] 13
What project size requires a formal quantitative analysis in your company No specified amount, 0-50k, 50-100k, 100-500k, 500-1m, 1-5m, >5m 9
What is the typical acceptance rate of projects that are formally analyzed? %
Has there been a major switch in the techniques used in the last five years? Yes; No 20
TECHNIQUES
What investment evaluation techniques do you use? NPV, IRR, Profitability index, Annual equivalent amount, Payback period, ROI, None 13
If you do not use capital budgeting techniques, why do you not do so? Unfamiliar with methods, do not believe they would change profitability, do not have the staff 13
time or experience, no available services
What risk adjustment techniques do you use? No adjustment made, adjustment is made subjectively, shortened payback period, risk-adjusted 10
discount rate, certainty equivalent approach, two methods are used, three methods are used,
four methods are used, other methods
Indicate the relative importance of each of the following quantitative techniques used in your firm IRR, payback period, NPV, accounting rate of return, other. 9
to rank proposed capital investments and to decide whether or not they should be accepted for Not used, 1, 2,3, 4, Important
inclusion in a capital budget [0-5 scale]
Do you apply your hurdle rate to nominal or constant dollar cash flows? Nominal; constant dollar 11
What form do you measure standards of profitability by? Urgency; payback before/after tax; payback reciprocal before/after tax; average accounting rate 2
of return on total investment before/after tax; average accounting rate of return on average
investment before/after tax; minimum rate of discounted cash flow; discounted present value of
cash flow
Rank the importance of these capital budgeting techniques Accounting rate of return; internal rate of return; net present value; payback period; profitability 6
index
Does your company conduct post-audits of major capital expenditures? Always; sometimes/on major projects; rarely; never 20
How frequently does your firm use the following techniques when deciding which projects or Net Present Value; Internal Rate of Return; Hurdle rate; Earnings multiple approach; Adjusted 16
acquisitions to pursue? Present Value; Payback period; Discounted payback period; profitability index; accounting rate of
return (book rate of return on assets); sensitivity analysis (good vs fair vs bad); value at-risk or
other simulation analysis; we incorporate "real options" of a project when evaluating it; other
What financial analysis techniques do you use when appraising major investments? Payback; ARR; IRR; NPV; DCF; (IRR or NPV); Non-financial criteria 20
What percentage of realized investments relates to each of the following? Expansion of productivity and replacement of old equipment, production of new goods, locating 13
new target markets, energy-saving projects
How frequently do you use different financial analysis techniques? Payback, ARR, IRR. NPV; rarely, often, mostly, always 20
What is the primary metric used as the required rate of return (hurdle rate)? Weighted average cost of capital, return on stockholders' equity, required rate in EPS, other 15
Are estimated cash flows (or earnings) of proposed capital investments evaluated before or after Before income taxes, after income taxes, both 9
income tax?
MISC
Do you explicitly consider the interaction between projects when making an investment decision? Yes; no 17
Have any of these considerations led to the acceptance of non-economic projects? Health & safety; legislation; R&D/strategically necessary; social/environmental; 20
repair/maintenance; charitable; other

APPENDIX B
DETERMINING THE COST OF CAPITAL

METHODS
What factors determine the cost of capital for investments' financing? Cost of borrowing, past experience, cost of equity capital, average cost of all capital the business 13
uses, yield on an asset without risk plus a percentage relating to the risk, other
Do you determine the cost of capital based on a before or after tax basis? Before-tax, after-tax 13
Which of the following procedures does your firm use to determine risk-adjusted discount rates? Proposed capital expenditures (projects) are classified into subjectively defined risk categories 9
(i.e. replacements, expansion of existing products, etc.) The discount rate for higher-risk projects
is a rate higher than the average cost of capital. The discount rate for lower-risk projects is a
rate lower than the average cost of capital ; A two-step procedure is used. First, divisional cost of
capital are established for each major operating division of the company. Second, within each
division, projects are classified into risk categories. Then, each division uses its divisional cost of
capital for average risk projects, and higher and lower discount rates for projects of higher and
lower risk, respectively ; The CAPM is used to determine project discount rates based on
estimates of each project's beta (or market risk)
Which of the following methods does your firm use to estimate its cost of equity capital? Capital Asset Pricing Model based upon the firm's equity beta; dividend yield plus growth rate 9
(discounted cash flow method); cost of debt plus risk premium; other
If you use DCF, how do you determine the discount rate to use? Cost of debt; measure based on past experience; rate based upon expected growth in earnings 6
and dividend; CAPM; WACC; another rate
How does your company derive the discount rate used in the appraisal of major capital WACC; cost of equity derived from CAPM; interest payable on debt capital; arbitrary chosen 20
investments? figure; dividend yield on shares plus estimated growth in capital value of shares; earnings yield
on shares; other
How do you calculate the weighted average cost of capital? Using the CAPM for equity and the market rate of return on debt capital; cost of equity calculated 20
other than through the CAPM with the cost of debt derived from current market interest rates;
other
If WACC is used, how do you define the weights? a long term target of debt and equity ratio; the present market values of debt and equity; 20
balance sheet ratios of debt and equity
Do you use a divisional cost of capital or a corporate-wide measure? Divisional cost-of-capital, corporate-wide measure of cost-of-capital 15
Does your firm estimate the cost of equity capital? Yes; No 16
How do you determine your firm's cost of equity? with average historic returns on common stock; using the capital asset pricing model (CAPM, the 16
"beta" approach), using the CAPM but including some extra "risk factors"; whatever our investors
tell us they require; by regulatory decision; back out from the dividend/earnings model e.g. price
= div./(cost of cap. - growth); other

APPENDIX B
RISK ADJUSTMENT
How do you determine the risk of a project? Subjective criteria, probability of losses, project cash flows relative to other different projects 13
How do you incorporate risk into the capital budgeting process? Increase the required rate of return, decrease the time of the payback period, increasing the 13
discount rate
What risk adjustment techniques do you use? No adjustment made, adjustment is made subjectively, shortened payback period, risk-adjusted 10
discount rate, certainty equivalent approach, two methods are used, three methods are used,
four methods are used, other methods
Indicate the relative importance of the following techniques used in your firm to assess risk [0-5 Scenario analysis (i.e. optimistic, most likely, pessimistic forecasts), sensitivity analysis, decision 9
scale] tree analysis, probabilistic, (Monte carlo) simulation, other
Not used, 1, 2,3, 4, Important
Which of the following approaches is used in your company to determine the minimum acceptable Single discount rate based on company's overall weighted average cost of capital used to evaluate 9
rate of return (discount rate) to evaluate capital investments? all proposed capital investments ; multiple risk-adjusted discount rates are used; the riskier the
investment, the higher the rate ; the discount rate used for each project is the cost of the specific
capital used to finance the project (i.e. the discount rate for a project financed entirely by debt is
the cost of debt)
What method does your firm use to consider risk? Raising the required return; shortening the payback period; determining the probability 2
distribution; measuring the covariance of projects; other [yes; no]
What techniques do you use to assess the risk of major projects? Sensitivity/scenario analysis; raise the required rate of return; subjective assessment; probability 20
analysis; shorten payback period; beta analysis; ignore risk; other
Do you adjust investment appraisal for inflation? Specify cash flows in constant prices and apply a real rate of return; all cash flows expressed in 20
inflated price terms and discounted at the market rate of return; considered at risk analysis or
sensitivity stage; no adjustment; other
What procedure do you use to adjust for risk? Subjective decision making, certainty equivalent approach, risk-adjusted discount rate. A table 15
explaining the latter was provided: Low or no risk (equipment replacement) - 0% through to
highest risk (new product in foreign market) - 20%
When valuing a project, do you adjust either the discount rate or cash flows for the following risk Risk of unexpected inflation; interest rate risk (change in general level of interest rates); term 16
factors? structure risk (change in the long-term vs. short-term interest rate); GDP or business cycle risk;
commodity price risk; foreign exchange risk; distress risk (probability of bankruptcy); size (small
firms being riskier); “market-to-book” ratio (ratio of market value of firm to book value of
assets); momentum (recent stock price performance); other
Do you consider portfolio effects when analyzing individual investments? Yes/No 15

How do you adjust for risk? Risk-adjusted discount rate; certainty equivalent approach; combination of the two; none 17
MANAGEMENT SCIENCE TECHNIQUES

Which risk analysis techniques to you use Total statistical analysis, Risk analysis with application scenarios, Sensitivity analysis, Risk 13
analysis with decision trees, none
If you do not use risk analysis tools, why not? Would not affect profits, unfamiliar with methods, no services available 13
Which management science techniques do you use? Decision theory, computer simulation, mathematical programming, game theory, PERT critical 10
analysis, regression analysis, two methods, three methods, four or more methods, none
Which management science techniques do you use? Game theory; linear programming; non-linear programming; computer simulation; probability 2
theory; decision theory; PERT/critical path; utility theory

APPENDIX B
INTERNATIONAL INVESTMENTS
RISK ANALYSIS
Do foreign investments tend to increase or decrease the risk exposure of your firm? Increase; decrease 17
Which risk do you perceive to be the greatest risk in foreign investments? Expropriation risk; currency risk; business (economic) risk; tax law changes; quotas and tariffs; 17
cultural problems
How is risk associated with a division or project measured in a capital budgeting context? An objective measure such as beta of a public company in the line of business as the subsidiary; 17
an objective measure that is not market related such as variability of the division's earnings
compared to the overall corporate earnings; a subjective measure such as top management's
view of the perceived risk generally associated with the division
Do you differentiate between systematic and unsystematic risk when incorporating risk into your Yes; no 17
capital budgeting analysis?
Do you use the same capital budgeting techniques for domestic and foreign investments? Yes; No 6
Do you give different weight to the applicability of different capital budgeting techniques for Yes; No 6
international vs domestic projects?
What method(s) do you use to adjust for different levels of risk in foreign projects? Adjusted cash flows; adjust cost of capital present value analysis; adjust payback period; adjust 6
required accounting rate of return on investment; borrow funds locally; insure risks where
possible; no distinction is made
Do you consider foreign project risk due to changes in exchange rates? Yes; No 6
Do you consider foreign project risk due to changes in inflation rates? Yes; No 6
Do you consider foreign project risk due to changes in political environment? Yes; No 6
CAPITAL STRUCTURE
Should a subsidiaries capital structure conform to the MNC's worldwide capital structure or to Worldwide; local 17
meet local conditions?
What factors affected your decision to issue debt in foreign countries? Favorable tax treatment relative to the U.S (e.g., different 16
corporate tax rates); keeping the “source of funds” close to the “use of funds”; providing a
“natural hedge” (e.g., if the foreign currency devalues, we are not obligated to pay interest in
US$); foreign regulations require us to issue debt abroad; foreign interest rates may be lower
than domestic interest
rates; other
COST OF CAPITAL
Do you use corporate-wide WACC as a base-line for all firm investments? Yes; no 17
How frequently would your company use the following discount rates when evaluating a new the discount rate for the entire company; the discount rate for the overseas market (country 16
project in an overseas market? To evaluate this project we would use… discount rate); a divisional discount rate (if the project line of business matches a domestic
division); a risk-matched discount rate for this particular project (considering both country and
industry); a different discount rate for each component of cash flow that has a different risk
characteristic (e.g. depreciation vs. operating cash flows)
What is more important in determining WACC, country of origin or industry? Country of origin; Industry 17
OPERATIONS
Should the activities of subsidiaries be monitored to ensure corporate wide targets are met? Yes; no 17
Has your firm seriously considered issuing debt in foreign countries? Yes; No 16
How do you evaluate your foreign affiliates? Based on remittance to MNC; affiliate profit (or cash flow) 17
INCOME MEASUREMENT
What definition do you use when measuring income from foreign affiliates? Earnings - count all expected accounting profits after foreign taxes, regardless of currency, count 6
all expected accounting profits after foreign taxes except where there are currency restrictions,
expected return on book investment; Cash flow - count all expected cash flows to the parent after
domestic and foreign taxes regardless of currency; count all the expected cashflows to the parent
plus reinvested earnings adjusted for domestic and foreign taxes; count all expected cash flows to
the parent plus reinvested earnings adjusted for foreign taxes only; Other

APPENDIX C
QUESTION ANSWERS
CORPORATE STRATEGY AND FOREIGN INVESTMENTS
Why does your company invest abroad? Access to new markets, access to raw materials, improved production efficiency, development of
new knowledge, political safety, fear of losing a market, “bandwagon” effect, strong competition
at home, diversification benefits
How do you decide where to invest? Based on competitive advantages, market imperfections, knowledge of geography, competitor
investments
How do you go about investing internationally? Do you have a preferred method? JV with foreign partners, M&A of existing foreign firm, licensing a foreign firm, undertaking a
management contract with a foreign firm
Which factors influence your choice of governance structure? Domestic taxation treatment, foreign taxation treatment, political requirements, prior business
relationships, loan subsidies
Do you actively position liquid cash balances between international affiliates? If so, how? Unbundling fund transfers; dividend remittances; payment of fees, royalties and home overhead
charges; transfer pricing; fronting loans; creating unrelated exports
INTERNATIONAL CAPITAL BUDGETING
At what level(s) do you perform your cash flow analysis for international projects? Project/subsidiary, parent/headquarter, group/shareholder
Do you adjust return/risk requirements for international projects? Shorten payback period, increase minimum investment thresholds – cash flows, revenues, profits
Do you adjust the discount rate due to the project being international in nature? For which risks? Exchange rate risk, inflation risk, interest rate risk, political risk, operational risk, different cost of
How? local debt, different equity beta -- risk premiums on international bonds/sovereign spreads,
insurance premiums charged by international risk insurers, export credit agencies, country and
political risk ratings
Do you adjust the projected cash flows due to the project being international in nature? For which Exchange rate risk, inflation risk, interest rate risk, political risk, operational risk -- subtract NPV
risks? How? of forgone cash flows, scenario probability analysis, more conservative on projection assumptions
Do you assess the cost of capital relative to local, regional or global firms? Local, regional, global
Do you subjectively adjust project analysis based on intuition/gut feel? Shorten-payback period, increased required rate of return, limit capital available
How do you determine the target leverage for the project? Same as firm’s target leverage, debt capacity of project, level of cash-on-hand for investment
Which sources of funds do you use more frequently when funding an international project? Funds generated internally by foreign affiliates – noncash charges, retained earnings; funds
generated from within the corporate family – equity investment/cash loans from parent, loans
other affiliates, affiliate borrow with parent guarantee; funds from sources external to the
corporate family – borrowing from sources in parent country (banks, securities markets), outside
of parent country (local/international debt markets), local equity (local shareholders, JV partners)
What political risks are of greatest concern? Expropriation, inconvertibility, imposition of a new tax, removal of agreed subsidy,
implementation of new tariffs, creating barriers to sourcing, unilateral changes to key contract
provision, ethnic strife
Do you try and mitigate any of the political risks associated with international investments? Political risk insurance, political lobbying, project governance
What is the functional currency of foreign affiliates? Local, parent, $

Do you forecast cash flows in local or parent currency? Local, parent
Do you use spot or forecast exchange rates for converting analysis into parent currency? Spot, forecast
Do you try and predict FOREX rates? If so, which factors do you monitor? Foreign trade, balance of payments, official reserves, GNP growth, industrial output, CAPEX,
consumer spending, unemployment, inflation, monetary policy, political stability, labor attitudes,
sociopolitical trends, interest rates, key dates, other
Which of the following foreign exchange risks do you identify? Do you hedge against them? With Translational, transactional, operating -- fully, partially, none -- forwards, options, other
what instrument?

70605147 EC Course Paper Appendix C: Page 1
APPENDIX D
NAME COMPANY JOB TITLE ADDRESS

1 D. D. Humphreys Exxon Mobil Corp. (NYSE:XOM) Chief Financial Officer 5959 Las Colinas Boulevard Irving Texas 75039-2298 United States
2 Chris Liddell Microsoft Corp. (NasdaqNM:MSFT) Chief Financial Officer One Microsoft Way Redmond Washington 98052-6399 United States
3 Thomas M. Schoewe Wal-Mart Stores Inc. (NYSE:WMT) Chief Financial Officer 702 SW Eighth Street Bentonville Arkansas 72716 United States
4 Clayton C. Daley Procter & Gamble Co. (NYSE:PG) Chief Financial Officer One Procter & Gamble Plaza Cincinnati Ohio 45202 United States
5 Robert J. Darretta Johnson & Johnson (NYSE:JNJ) Chief Financial Officer One Johnson & Johnson Plaza New Brunswick New Jersey 08933 United States
6 Andy D. Bryant Intel Corp. (NasdaqNM:INTC) Chief Financial Officer 2200 Mission College Boulevard Santa Clara California 95052-8119 United States
7 Alan Levin Pfizer Inc. (NYSE:PFE) Chief Financial Officer 235 East 42nd Street New York New York 10017 United States
8 Dinyar S. Devitre Altria Group Inc. (NYSE:MO) Chief Financial Officer 120 Park Avenue New York New York 10017 United States
9 Stephen J. Crowe Chevron Corp. (NYSE:CVX) Chief Financial Officer 6001 Bollinger Canyon Road San Ramon California 94583 United States
10 George Reyes Google Inc. (NasdaqNM:GOOG) Chief Financial Officer 1600 Amphitheatre Parkway Mountain View California 94043 United States
11 Dennis D. Powell Cisco Systems Inc. (NasdaqNM:CSCO) Chief Financial Officer 170 West Tasman Drive San Jose California 95134 United States
12 David Ebersman Genentech Inc. (NYSE:DNA) Chief Financial Officer 1 Dna Way South San Francisco California 94080-4990 United States
13 Richard D. Nanula Amgen Inc. (NasdaqNM:AMGN) Chief Financial Officer One Amgen Center Drive Thousand Oaks California 91320-1799 United States
14 Indra K. Nooyi Pepsico Inc. (NYSE:PEP) Chief Financial Officer 700 Anderson Hill Road Purchase New York 10577 United States
15 Richard G. Lindner AT&T Inc. (NYSE:SBC) Chief Financial Officer 175 East Houston San Antonio Texas 78205 United States
16 Doreen A. Toben Verizon Communications Inc. (NYSE:VZ) Chief Financial Officer 1095 Avenue of the Americas New York New York 10036 United States
17 Carol B. Tome Home Depot Inc. (NYSE:HD) Chief Financial Officer 2455 Paces Ferry Road NW Atlanta Georgia 30339 United States
18 John A. Carrig ConocoPhillips (NYSE:COP) Chief Financial Officer 600 North Dairy Ashford Houston Texas 77079 United States
19 D. ScoDavis United Parcel Service Inc. (NYSE:UPS) Chief Financial Officer 55 Glenlake Parkway NE Atlanta Georgia 30328 United States
20 Wayne H. Pace Time Warner Inc. (NYSE:TWX) Chief Financial Officer One Time Warner Center New York New York 10019 United States
21 Robert J. Dellinger Sprint Nextel Corp. (NYSE:S) Chief Financial Officer 2001 Edmund Halley Drive Reston Virginia 20191 United States
22 Gary Ellis Medtronic Inc. (NYSE:MDT) Chief Financial Officer 710 Medtronic Parkway Minneapolis Minnesota 55432 United States
23 Safra Catz Oracle Corp. (NasdaqNM:ORCL) Chief Financial Officer 500 Oracle Parkway Redwood City California 94065 United States
24 Judy C. Lewent Merck & Co. Inc. (NYSE:MRK) Chief Financial Officer PO Box 100One Merck Drive Whitehouse Station New Jersey 08889-0100 United States
25 Rajiv Dutta eBay Inc. (NasdaqNM:EBAY) Chief Financial Officer 2145 Hamilton Avenue San Jose California 95125 United States
26 David W. Devonshire Motorola Inc. (NYSE:MOT) Chief Financial Officer 1303 East Algonquin Road Schaumburg Illinois 60196 United States
27 Patrick D. Campbell 3M Co. (NYSE:MMM) Chief Financial Officer 3-M Center St Paul Minnesota 55144 United States
28 Peter Oppenheimer Apple Computer Inc. (NasdaqNM:AAPL) Chief Financial Officer 1 Infinite Loop Cupertino California 95014 United States
29 Charles E. Golden Eli Lilly & Co. (NYSE:LLY) Chief Financial Officer Lilly Corporate Center Indianapolis Indiana 46285 United States
30 John R. Alchin Comcast Corp. (NasdaqNM:CMCS.A) Chief Financial Officer 1500 Market Street Philadelphia Pennsylvania 19102-2148 United States
31 Thomas C. Freyman Abbott Laboratories (NYSE:ABT) Chief Financial Officer 100 Abbott Park Road Abbott Park Illinois 60064-6400 United States
32 Susan Decker Yahoo! Inc. (NasdaqNM:YHOO) Chief Financial Officer 701 First Avenue Sunnyvale California 94089 United States
33 Jean-Marc Perraud Schlumberger Ltd. (NYSE:SLB) Chief Financial Officer 153 East 53 Street57th Floor New York New York 10022-4624 United States
34 Kenneth J. Martin Wyeth (NYSE:WYE) Chief Financial Officer Five Giralda Farms Madison New Jersey 07940 United States
35 James E. Geisler United Technologies Corp. (NYSE:UTX) Chief Financial Officer United Technologies Building Hartford Connecticut 06101 United States
36 Kevin P. March Texas Instruments Inc. (NYSE:TXN) Chief Financial Officer 12500 Ti BoulevardPO Box 660199 Dallas Texas 75266-0199 United States
37 Robert F. Hull Lowe's Companies Inc. (NYSE:LOW) Chief Financial Officer 1000 Lowes Boulevard Mooresville North Carolina 28117 United States
38 Ronald M. Dykes BellSouth Corp. (NYSE:BLS) Chief Financial Officer 1155 Peachtree Street NE Atlanta Georgia 30309-3610 United States
39 Thomas Staggs Walt Disney Co. (NYSE:DIS) Chief Financial Officer 500 South Buena Vista Street Burbank California 91521 United States
40 David F. DeVoe News Corp. (NYSE:NWS.A) Chief Financial Officer 1211 Avenue of the Americas New York New York 10036 United States
41 Gerald R. Cahill Carnival Corp. (NYSE:CCL) Chief Financial Officer 3655 NW 87th Avenue Miami Florida 33178-2428 United States
42 William M. Rudolphsen Walgreen Co. (NYSE:WAG) Chief Financial Officer 200 Wilmot Road Deerfield Illinois 60015 United States
43 J. PedReinhard Dow Chemical Co. (NYSE:DOW) Chief Financial Officer 2030 Dow Center Midland Michigan 48674 United States
44 Andrew Bonfield Bristol-Myers Squibb Co. (NYSE:BMY) Chief Financial Officer 345 Park Avenue New York New York 10154 United States
45 Gary M. Pfeiffer EI DuPont de Nemours & Co. (NYSE:DD) Chief Financial Officer 1007 Market Street Wilmington Delaware 19898 United States
46 John D. Watson EnCana Corp. (TSX:ECA) Chief Financial Officer 855-2nd Street SWSuite 1800 Calgary Alberta T2p 2s5 Canada
47 William J. Teuber EMC Corp. (NYSE:EMC) Chief Financial Officer 176 South Street Hopkinton Massachusetts 01748 United States
48 C. Chr Gaut Halliburton Co. (NYSE:HAL) Chief Financial Officer 1401 MckinneySuite 2400 Houston Texas 77010 United States
49 Stephen I. Chazen Occidental Petroleum Corp. (NYSE:OXY) Chief Financial Officer 10889 Wilshire Boulevard Los Angeles California 90024 United States
50 Walter J. Galvin Emerson Electric Co. (NYSE:EMR) Chief Financial Officer 8000 W Florissant AvenuePO Box 4100 St. Louis Missouri 63136 United States

70605147 EC Course Paper Appendix D: Page 1
APPENDIX D
NAME COMPANY JOB TITLE ADDRESS

51 Paul A. Smith Imperial Oil Ltd. (TSX:IMO) Chief Financial Officer 111 St Clair Avenue West Toronto Ontario M5W 1K3 Canada
52 David J. Anderson Honeywell International Inc. (NYSE:HON) Chief Financial Officer 101 Columbia Road Morris Township New Jersey 07962 United States
53 Michael S. Ciskowski Valero Energy Corp. (NYSE:VLO) Chief Financial Officer One Valero Way San Antonio Texas 78249 United States
54 James B. Flaws Corning Inc. (NYSE:GLW) Chief Financial Officer One Riverfront Plaza Corning New York 14831 United States
55 Nancy H. Handel Applied Materials Inc. (NasdaqNM:AMAT) Chief Financial Officer 3050 Bowers AvenuePO Box 58039 Santa Clara California 95052-8039 United States
56 Alan B. Graf FedEx Corporation (NYSE:FDX) Chief Financial Officer 942 South Shady Grove Road Memphis Tennessee 38120 United States
57 Stephen C. Patrick Colgate-Palmolive Co. (NYSE:CL) Chief Financial Officer 300 Park Avenue New York New York 10022 United States
58 Robert J. Bertolini Schering-Plough Corp. (NYSE:SGP) Chief Financial Officer 2000 Galloping Hill Road Kenilworth New Jersey 07033 United States
59 Mark A. Buthman Kimberly-Clark Corp. (NYSE:KMB) Chief Financial Officer PO Box 619100 Dallas Texas 75261-9100 United States
60 Brian J. Jennings Devon Energy Corp. (NYSE:DVN) Chief Financial Officer 20 North Broadway Oklahoma City Oklahoma 73102-8260 United States
61 Jeffrey W. Henderson Cardinal Health Inc. (NYSE:CAH) Chief Financial Officer 7000 Cardinal Place Dublin Ohio 43017 United States
62 Christoph E. Kubasik Lockheed Martin Corp. (NYSE:LMT) Chief Financial Officer 6801 Rockledge Drive Bethesda Maryland 20817 United States
63 J. KenAlley Suncor Energy Inc. (TSX:SU) Chief Financial Officer 112 Fourth Avenue SWPO Box 38 Calgary Alberta T2P 2V5 Canada
64 Thomas A. Fanning Southern Co. (NYSE:SO) Chief Financial Officer 270 Peachtree Street NW Atlanta Georgia 30303 United States
65 Douglas A. Proll Canadian Natural Resources Ltd. (TSX:CNQ) Chief Financial Officer 855-2nd Street SWSuite 2500 Calgary Alberta T2P 4J8 Canada
66 Jon C. Kinney Illinois Tool Works Inc. (NYSE:ITW) Chief Financial Officer 3600 West Lake Avenue Glenview Illinois 60026-1215 United States
67 Kirk R. Oliver TXU Corp. (NYSE:TXU) Chief Financial Officer 1601 Bryan Street Dallas Texas 75201-3411 United States
68 John J. Greisch Baxter International Inc. (NYSE:BAX) Chief Financial Officer One Baxter Parkway Deerfield Illinois 60015-4633 United States
69 Richard B. Kelson Alcoa Inc. (NYSE:AA) Chief Financial Officer 201 Isabella Street Pittsburgh Pennsylvania 15212-5858 United States
70 John F. Milligan Gilead Sciences Inc. (NasdaqNM:GILD) Chief Financial Officer 333 Lakeside Drive Foster City California 94404 United States
71 Darren R. Jackson Best Buy Co. Inc. (NYSE:BBY) Chief Financial Officer 7601 Penn Avenue South Richfield Minnesota 55423 United States
72 Peter J. Clemens Caremark Rx Inc. (NYSE:CMX) Chief Financial Officer 211 Commerce StreetSuite 800 Nashville Tennessee 37201 United States
73 R. Milt Johnson HCA Inc. (NYSE:HCA) Chief Financial Officer One Park Plaza Nashville Tennessee 37203 United States
74 Michael J. Mancuso General Dynamics Corp. (NYSE:GD) Chief Financial Officer 2941 Fairview Park DriveSuite 100 Falls Church Virginia 22042-4153 United States
75 Richard A. Galanti Costco Wholesale Corp. (NasdaqNM:COST) Chief Financial Officer 999 Lake Drive Issaquah Washington 98027 United States
76 Siim A. Vanaselja BCE Inc. (TSX:BCE) Chief Financial Officer 1000 Rue De La Gauchetire OuestBureau 3700 Montreal Quebec H3B 4Y7 Canada
77 Janet F. Clark Marathon Oil Corp. (NYSE:MRO) Chief Financial Officer 5555 San Felipe Road Houston Texas 77056-2723 United States
78 David B. Rickard CVS Corp. (NYSE:CVS) Chief Financial Officer One CVS Drive Woonsocket Rhode Island 02895 United States
79 Donald W. Blair Nike Inc. (NYSE:NKE) Chief Financial Officer One Bowerman Drive Beaverton Oregon 97005-6453 United States
80 Roger B. Plank Apache Corp. (NYSE:APA) Chief Financial Officer Suite 100 One Post Oak Central2000 Post Oak BouleHouston Texas 77056-4400 United States
81 Kenneth L. Rice Boston Scientific Corp. (NYSE:BSX) Chief Financial Officer One Boston Scientific Place Natick Massachusetts 01760-1537 United States
82 Gregory L. Cauthen Transocean Inc. (NYSE:RIG) Chief Financial Officer 4 Greenway Plaza Houston Texas 77046 United States
83 R. A. Walker Anadarko Petroleum Corp. (NYSE:APC) Chief Financial Officer 1201 Lake Robbins Drive The Woodlands Texas 77380-1046 United States
84 David J. AFlowers Liberty Media Corp. (NYSE:L) Chief Financial Officer 12300 Liberty Boulevard Englewood Colorado 80112 United States
85 Richard O'Brien Newmont Mining Corp. (NYSE:NEM) Chief Financial Officer 1700 Lincoln Street Denver Colorado 80203 United States
86 Ernest F. HRoberts Petro-Canada (TSX:PCA) Chief Financial Officer 150-6th Avenue SW Calgary Alberta T2P 3E3 Canada
87 Wesley G. Bush Northrop Grumman Corp. (NYSE:NOC) Chief Financial Officer 1840 Century Park East Los Angeles California 90067 United States
88 Keith E. Brauer Guidant Corp. (NYSE:GDT) Chief Financial Officer 111 Monument Circle29th Floor Indianapolis Indiana 46204-5129 United States
89 George Ste Finley Baker Hughes Inc. (NYSE:BHI) Chief Financial Officer 3900 Essex LaneSuite 1200 Houston Texas 77027 United States
90 Thomas J. Szkutak Amazon.com Inc. (NasdaqNM:AMZN) Chief Financial Officer 1200 12th Avenue SouthSuite 1200 Seattle Washington 98144-2734 United States
91 John K. Stubblefield Sysco Corp. (NYSE:SYY) Chief Financial Officer 1390 Enclave Parkway Houston Texas 77077-2099 United States
92 Robert J. Bahash McGraw-Hill Companies Inc. (NYSE:MHP) Chief Financial Officer 1221 Avenue of the Americas New York New York 10020 United States
93 Michael S. Wyzga Genzyme Corp. (NasdaqNM:GENZ) Chief Financial Officer 500 Kendall Street Cambridge Massachusetts 02142 United States
94 Gregory E. Myers Symantec Corp. (NasdaqNM:SYMC) Chief Financial Officer 20330 Stevens Creek Boulevard Cupertino California 95014-2132 United States

70605147 EC Course Paper Appendix D: Page 2

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INTERNATIONAL FINANCIAL MANAGEMENT

HARVARD BUSINESS SCHOOL

“INTERNATIONAL CAPITAL BUDGETING IN PRACTICE”

• To develop a survey instrument aimed at providing a rich description of the

Marc Lien International Financial Management Page 2

1. UNDERSTAND PREVIOUS ACADEMIC RESEARCH

Prior to engaging in a new piece of academic research, I felt it important to review

1. Determine whether a gap exists between capital budgeting practices in the

Later studies suggest the level of financial sophistication may be increasing in

Marc Lien International Financial Management Page 3

2. Review whether capital budgeting procedures differ across industries,

Many started investigating differing practices across countries: Kester [9]

A second dimension was to look at whether sophisticated techniques were

These differences in practices between countries, industries and firms of

3. Investigate the challenges of capital budgeting for Multinational Corporations

In addition to comparing capital budgeting practices in a domestic setting

Marc Lien International Financial Management Page 4

Block’s paper is excellent in capturing the very latest practices in international

Marc Lien International Financial Management Page 5

2. DEFINE RESEARCH OBJECTIVES

Marc Lien International Financial Management Page 6

3. DEVELOP DRAFT RESEARCH INSTRUMENTS

Key issues with selecting survey method

Marc Lien International Financial Management Page 7

Marc Lien International Financial Management Page 8

Developing Survey Questions

Marc Lien International Financial Management Page 9

Appendix B provides a categorized list of all the research questions asked in 10

The categories I used when reviewing the survey questions are:

• Firm characteristics (industry, financials, international)

Marc Lien International Financial Management Page 10

4. REFINE SURVEY INSTRUMENT

The first pretest results, hopefully, in a much-changed, finished instrument. The

Marc Lien International Financial Management Page 11

5. SELECT TARGET COMPANIES

2. Use CapitalIQ – available through the Baker Library Resources – to create a

3. Cross-reference the filtered CapitalIQ companies with those in the ORBIS

Marc Lien International Financial Management Page 12

CONSTRUCT DELIVERY MECHANISM

Outbound survey channels

Inbound survey channels

Marc Lien International Financial Management Page 13

7. DESIGN MARKETING APPROACH

Marc Lien International Financial Management Page 14

Firms consistently overestimate the cost of capital for international investments

One of the foundations of capital budgeting theory is the determination of equity

Managers unfortunately engage in shareholder value destruction by executing

Marc Lien International Financial Management Page 15

The objective of maximizing shareholder wealth also differs across countries.

Marc Lien International Financial Management Page 16

Managers have a tendency to overstate the required rate of return on domestic

Several viable explanations enlighten us to why managers consistently overstate the

Problems with the NPV method cause project valuations to be understated

Top management’s incentive to scale back the optimism of project sponsors

Marc Lien International Financial Management Page 17

These tendencies are compounded by managers overestimating the incremental risk-

Marc Lien International Financial Management Page 18

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RESEARCH MAJOR TOPICS INTERNATIONAL

Marc Lien International Financial Management

RESEARCH MAJOR TOPICS INTERNATIONAL

Marc Lien International Financial Management

RESEARCH MAJOR TOPICS INTERNATIONAL