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Finance Project: Process of Capital Budgeting & Decision Making

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Five brief articles to reference are found on the "Headlines" page of the menu for GE on Yahoo! Finance. These articles were posted on Thursday, April 21, 2011 and Friday, April 22, 2011. Additionally, as you construct your answers, please reference not only General Electric (GE) but also Citigroup, Inc. (C), Koninklijke Philips Electronics NV (PHG), and Siemens AG (SI) which are shown as competitors for General Electric.

The articles from the "Headlines" page are: 10 Dividend Stocks Paying More Cash, Companies Start Opening Their Wallets; G.E. Earnings Soar on Lending Arm, Daily Dividend Report and, Commercial Real Estate Comeback Needs Job Growth to Continue.

a) Discuss the process of capital budgeting, the weighted average cost of capital, optimal capital budget, and optimal capital structure. No calculations or comparisons to other companies are necessary. Discussion should include business circumstances as reflected in the articles.

b) Discuss the decision making process that relates to dividends. Mention specific amounts for GE and the other three companies, as well as material from the articles.

c) Discuss the investing and financing decisions that relate to working capital management. Calculations are expected for GE as compared to the other three companies. No reference to articles is necessary.

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The solution describes the process of capital budgeting and decision making.

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Question A
Capital budgeting is the allocation of the organization scarce resources, particularly funds, into long term assets such as machineries, plant facilities, and equipment and activities through purchase, construction, repair and replacement projects are aligned with the company's overall goal.
The overall goal of an organization is the maximization of stockholders' wealth as commonly measured through its stock price. Companies use a variety of capital budgeting tools and techniques in deciding what project to finance and what not to. These tools include net present value analysis, internal rate of return, and discounted cash flows among others.
For example, in its capital budgeting strategy decision making for the coming fiscal year, General Electric (NYSE: GE) may want to invest a bulk of its budget on its lending arm given that the subsidiary's performance in the recently concluded quarter was so spectacular that it buoyed the entire organization's earnings by 77% (Sechler, 2011).
On the other hand, the weighted average cost of capital is a benchmark used by organizations in comparing the estimated 'wealth' or value it ...

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