- Review Module 4-Handout 2 (spreadsheet) and watch its video. Module 4-Handout #2 (spreadsheet) is not the homework spreadsheet. This spreadsheet is for practice only and it will show you how to perform NPV, IRR, Profitability Index, and Payback Period calculations.
- Download the homework spreadsheet here:
- Complete this homework spreadsheet based on what you learned from the video for Week 4: Module 3-Handout #3. Notice that the homework spreadsheet has different numbers.
- Note: In the lecture video for Week 4: Module 3-Handout #3, the first entry should be G27, not G22 in the Rank function when we calculate the Number of Years Prior to Full Recovery.
Module 4: CL Discussion 4 — How Do CFOs Make Capital Budgeting Decisions?
Class and Life Discussion – How Do CFOs Make Capital Budgeting Decisions?
Assigned Reading/Video:
Assigned Reading: Graham & Harvey (2002). “How Do CFOs Make Capital Budgeting and Capital Structure Decisions?” Journal of Applied Corporate Finance
(Note: This module uses a journal article rather than a YouTube video.)
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Here are a few prompts to help you come up with some topics to talk about:
Prompt 1 Theory vs. Practice: A Lingerin
Graham and Harvey discover that while the majority of CFOs use NPV and IRR as their primary capital budgeting tools quite consistent with academic theory the decisions around capital structure are dominated by rules of thumb and a desire to maintain financial flexibilities rather than minimize WACC. Why do you think this gap between theory and practice exists, especially regarding capital structure, even with highly educated CFOs in large firms?
Prompt 2 NPV v/s IRR: Why Both?
74.9% of CFOs always or almost always calculate NPV, and 75.7% do so for IRR but these two measures can signal contradictory recommendations, especially under conditions such as having non-conventional cash flows or when comparing mutually exclusive projects. Why do you think CFOs tend to use both rather than pick one? Under what circumstances would you encourage a CFO to favor NPV over IRR, and why?
Prompt 3 The Stubborn Persistence of the Payback Period
56.7 percent of CFOs still use the payback period a technique that disregards the time value of money and has been denounced in textbooks for decades. For capital-constrained firms, payback may indeed be rational, the authors suggest. Do you agree? Build the best possible case as to why it might make economic sense for a financially stressed small company to choose payback over NPV.
Prompt 4 Big Firms Are Bigger vs. Small Firms Are Smaller
A noticeable pattern in the survey shows that, while small firms utilize payback more as well as informal techniques, NPV, CAPM and sensitivity analysis are used significantly more by larger firms. What structural and resource limitations account for this disparity? Does this imply that small companies are making systematic errors in capital budgeting decisions, or simply adapting rational tools to their information environment?
Prompt 5 CFOs and EPS Obsession
One very interesting finding is that CFOs are averse to issuing equity even when it might be theoretically optimal this reluctance stems largely from fear of EPS dilution. This is contrary to agency theory and information asymmetry models, according to the authors. Why do you think CFOs attribute such an inordinate amount of weight to EPS, and what does that tell us about the real objective function managers are optimizing?
Prompt 6 Financial Flexibility as the Ultimate Capital Structure Objective
Instead of aiming for a debt ratio that minimizes WACC, most CFOs surveyed reported that their foremost priority was to preserve financial flexibility the capacity to seize opportunities and survive downturns. What role does this kind of behavioral motivation have in reconciling the Modigliani-Miller theorem with the trade-off theory of capital structure? Is financial flexibility a true academic goal or a behavioral bias against being aggressive?
Prompt 7 The CAPM Dominance Puzzle
73.5% of CFOs apply CAPM to estimate the cost of equity making it the dominant approach yet CAPM has well-documented empirical failures (e.g., size effect, value premium). Why do you think the practitioners continue to assign such a large importance to CAPM despite its limitations? Yet this raises the question of what we should believe about theoretical elegance and practical usability in corporate finance?
Prompt 8 Real Options: Awareness Not Implementation
Over 25% of firms reported using real options analysis, which was a surprise to the researchers since it is a complex method. But other evidence points to most real options users applying the concept qualitatively, not quantitatively. Is qualitative real options reasoning acknowledging the worth of flexibility without actually modeling it in a formal way still useful? How could a CFO apply real options reasoning to an investment decision, without using Black-Scholes?
Prompt 9 The Characteristics of CEOs and Corporate Finance Decisions
Graham and Harvey discover that MBA-holding CEOs are more inclined to use NPV and CAPM while older, long-tenured CEOs (and not MBAs) opt for payback. What are the corporate governance implications of this? How does managerial entrenchment affect capital budgeting methodology, and should boards care about the analytical toolkit their CEO brings to capital allocation decisions?
10 Prompt Sophistication and Leverage Chicken-Egg
Firms with high leverage are more likely to use sophisticated capital budgeting tools (such as NPV, IRR, sensitivity analysis). The authors credit this to Jensens discipline argument debt pressure pushes managers to be strict. It can also be the other way around: Does leverage create rigor? Or do rigorous firms elect to use leverage when they feel confident in their cash flow projections? How would you plan a study that could untangle causation from correlation in this case?
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Assignment Overview
This discussion board assignment requires you to engage critically with assigned course material and participate meaningfully in scholarly dialogue with your peers. You will submit two posts: one original post analyzing the assigned material, and one response post engaging with a classmate’s analysis.
Part 1: Original Post (12 points)
Objective
Provide a substantive analysis of the assigned material that demonstrates critical thinking, application of course concepts, and professional communication skills.
Requirements
Content Expectations:
- Present your key takeaway or perspective on the assigned material
- Explicitly connect your analysis to relevant course concepts, theories, or frameworks
- Support your position with specific evidence from the source material
- Write as if presenting your professional opinion to a supervisor in a business meeting
Technical Specifications:
- Recommended length: 150-500 words
- Minimum course concepts: Reference at least 2 specific finance theories, models, or principles
- Minimum source references: Include at least 2 specific citations from the assigned material (e.g., data points, timestamps, examples)
Quality Standards:
- Demonstrate original thinking and personal analysis
- Maintain professional tone and academic writing standards
- Ensure clarity, organization, and grammatical accuracy
Part 2: Response Post (8 points)
Objective
Engage substantively with a classmate’s original post to advance the intellectual discourse and demonstrate collaborative learning.
Requirements
Formatting:
- Title format (required): “Response Post to the Original Post by [Classmate First Name Last Name]”
- Example: “Response Post to the Original Post by Serkan Karadas”
Content Expectations: Your response must go beyond simple agreement or disagreement. Substantive engagement includes:
- Explaining the reasoning behind your agreement or disagreement with specific points
- Introducing additional examples, data, or perspectives that extend the discussion
- Connecting your classmate’s analysis to other course concepts or real-world applications
- Asking thoughtful follow-up questions that deepen the conversation
What Does NOT Constitute a Valid Response:
- “I agree with you.”
- “Good post.”
- “I feel the same way.”
What DOES Constitute a Valid Response:
- “I agree with your application of Modern Portfolio Theory here, and I would like to add that…”
- “While I appreciate your perspective on diversification, I interpret the data differently because…”
- “Building on your point about risk-return tradeoffs, have you considered how this applies to…”
Technical Specifications:
- Minimum length: 100 words
- Tone: Professional, respectful, and collegialeven when expressing disagreement
Submission Requirements and Policies
Posting Sequence
- You must submit your original post before viewing other students’ posts (enforced by Canvas settings)
- This ensures independent thinking and prevents echo-chamber effects
Deadlines
- Strongly encouraged: Submit your original post by 11:59 PM CST on Day 4
- Early posting allows adequate time for peer engagement and thoughtful responses
- Official deadline: Both original post and response post are due by 11:59 PM CST on Day 7
- Late submissions: 10% penalty per day late
Response Post Protocol
- You must respond to a different classmate’s original post (not your own)
- Exception: If you are the only student with an original post close to the deadline, you may respond to your own post as a last resort
- However, you should check Canvas periodically before the deadline to respond to a classmate if possible
- Example: If you post on Day 6 and no other posts are visible, check again on Day 7 before responding to yourself
Grading Philosophy
Academic Rigor
This assignment values thoughtful, well-supported, and relevant contributions over “right” or “wrong” answers. Your grade will reflect:
- Depth of critical analysis
- Quality of evidence and reasoning
- Effective application of course concepts
- Professional communication skills
- Meaningful peer engagement
Collaborative Learning
Responses that help clarify, synthesize, or extend your classmates’ ideas demonstrate that you have carefully read and thoughtfully considered their contributions. Such responses fulfill the highest standards of the grading rubric.
Professional Discourse
- Expressing disagreement: State your position clearly and politely, supporting it with evidence and reasoning
- Maintaining respect: Avoid language that could be perceived as dismissive, condescending, or offensive
- Conflict resolution: Should disagreement escalate to conflict, initiate immediate resolution and offer apologies for any personal contribution to the situation
Example Scenario
Class composition: Five students (A, B, C, D, E)
Required submissions:
- Each student submits one original post (5 total original posts)
- Each student submits one response post to a different student’s original post
Example:
- Student A submits an original post
- Student A reads all available original posts
- Student A submits a response post to Student E’s original post
- Student A has now fulfilled both requirements
Grading Criteria
Original Post (12 points total)
1. Word Count Requirement (2 points)
- 2 points: Original post is between 150-500 words
- 0 points: Original post is less than 150 words or more than 500 words
Rationale: Ensures substantive content without excessive length. Too short = insufficient depth; too long = lack of conciseness.
2. Course Concept Integration (3 points)
- 3 points: Explicitly mentions and applies at least 2 specific finance concepts, theories, or models from the course (e.g., Modern Portfolio Theory, efficient frontier, diversification, risk-return tradeoff, correlation, duration, etc.)
- 2 points: Mentions and applies 1 specific finance concept from the course
- 0 points: Does not explicitly mention or apply any course concepts
Must name the concept explicitly (e.g., “According to Modern Portfolio Theory…” or “The efficient frontier suggests…”)
3. Source Material Reference (2 points)
- 2 points: Includes at least 2 specific references to content from the assigned material (e.g., specific data points, arguments, examples, or timestamps from video)
- 1 point: Includes 1 specific reference to the assigned material
- 0 points: No specific references to the assigned material (only vague/general statements)
Example of specific reference: “Berger showed that the 60/40 portfolio returned X% over Y years using Portfolio Visualizer data” vs. vague: “The video talked about portfolios”
4. Personal Analysis/Opinion (3 points)
- 3 points: Clearly states a personal position/opinion AND provides at least 2 supporting reasons or pieces of evidence for that position
- 2 points: States a personal position but provides only 1 supporting reason
- 0 points: No clear personal position, or position stated without any supporting reasoning
The “supervisor test”: Would your response be adequate if your boss asked your professional opinion?
5. Professional Writing Quality (2 points)
- 2 points: Post has fewer than 3 grammatical/spelling errors AND is well-organized with clear paragraphs
- 1 point: Post has 3-5 grammatical/spelling errors OR lacks clear organization
- 0 points: Post has more than 5 grammatical/spelling errors OR is poorly organized/difficult to follow
Use spell-check and proofread before posting!
Response Post (8 points total)
6. Word Count Requirement (1 point)
- 1 point: Response post is at least 100 words
- 0 points: Response post is less than 100 words
7. Proper Formatting (1 point)
- 1 point: Response post is clearly titled: “Response Post to the Original Post by [Classmate First Name Last Name]”
- 0 points: Response post does not follow the required title format
8. Substantive Engagement (3 points)
- 3 points: Response includes at least 2 of the following:
- Identifies a specific point from the classmate’s post and explains agreement/disagreement with reasoning
- Asks a thoughtful follow-up question that extends the discussion
- Provides a new example, data point, or perspective that builds on the classmate’s ideas
- Connects the classmate’s post to a different course concept or real-world application
- 2 points: Response includes 1 of the above elements
- 0 points: Response is merely agreement/disagreement without explanation (e.g., “I agree with you” or “Good post”)
Simple agreement without explanation does NOT count as substantive engagement.
9. Professional Tone (1 point)
- 1 point: Response maintains a respectful, professional tone throughout (even if disagreeing)
- 0 points: Response includes unprofessional, disrespectful, or dismissive language
10. Writing Quality (2 points)
- 2 points: Response has fewer than 3 grammatical/spelling errors AND is clearly written
- 1 point: Response has 3-5 grammatical/spelling errors
- 0 points: Response has more than 5 grammatical/spelling errors
Total: 20 Points
ORIGINAL POST: 12 Points Total
- Word count (150-500 words): 2 points
- Course concepts (minimum 2 concepts): 3 points
- Source references (minimum 2 references): 2 points
- Personal analysis with support: 3 points
- Writing quality: 2 points
RESPONSE POST: 8 Points Total
- Word count (minimum 100 words): 1 point
- Proper formatting: 1 point
- Substantive engagement: 3 points
- Professional tone: 1 point
- Writing quality: 2 points
Examples of Meeting Criteria
Example 1: Course Concept Integration (3 points)
Insufficient (0 points): “The video talks about how portfolios should be balanced. I think this makes sense for investors.”
Meets requirement (3 points): “Berger’s analysis applies Modern Portfolio Theory (MPT), which suggests that combining assets with low correlation can reduce overall portfolio risk. The 60/40 allocation specifically leverages the historically negative correlation between stocks and bonds to optimize the risk-return tradeoff along the efficient frontier.”
Example 2: Source Material Reference (2 points)
Insufficient (0 points): “The video mentioned that the 60/40 portfolio has performed well historically.”
Meets requirement (2 points): “According to Berger’s Portfolio Visualizer data, the 60/40 portfolio has delivered an average annual return of approximately 9.5% since 1970 (timestamp 4:32). He also specifically addresses the 2022 criticism, noting that this was only the third time in history both stocks and bonds declined simultaneously (timestamp 7:15).”
Example 3: Substantive Engagement (3 points)
Insufficient (0 points): “I agree with your post. You made good points about the portfolio.”
Meets requirement (3 points): “I appreciate your point about the 60/40 portfolio’s resilience, but I’d like to offer a different perspective on the duration risk you mentioned. While you’re correct that rising rates hurt bond prices, the current yield environment in 2026 actually provides a cushion that wasn’t present in the 2010s. With 10-year Treasury yields around 4-5%, bonds now offer meaningful income that can offset price declines. This connects to our Week 2 discussion on yield-to-maturity calculations.
I’m curious: do you think investors should adjust the 40% bond allocation based on their age and time horizon? For example, should a 30-year-old investor reduce bond exposure given their longer investment timeline?”
(This response: 1) explains disagreement with reasoning, 2) provides new perspective with course concept, and 3) asks a thoughtful follow-up question = 3 elements = 3 points)
Self-Assessment Tool
Before submitting your discussion board posts, complete this self-assessment:
ORIGINAL POST SELF-ASSESSMENT
Criterion 1: Word Count (150-500 words) – 2 points possible
- My word count: _____ words
- My self-assessment score: _____ out of 2 points
Criterion 2: Course Concepts (minimum 2) – 3 points possible
- Course concept 1: _______________________
- Course concept 2: _______________________
- My self-assessment score: _____ out of 3 points
Criterion 3: Source References (minimum 2) – 2 points possible
- Source reference 1: _______________________
- Source reference 2: _______________________
- My self-assessment score: _____ out of 2 points
Criterion 4: Personal Analysis with Support – 3 points possible
- My position/opinion: _______________________
- Supporting reason 1: _______________________
- Supporting reason 2: _______________________
- My self-assessment score: _____ out of 3 points__
Criterion 5: Writing Quality – 2 points possible
- Number of grammatical/spelling errors: _____
- My self-assessment score: _____ out of 2 points
ORIGINAL POST SUBTOTAL: _____ out of 12 points
RESPONSE POST SELF-ASSESSMENT
Criterion 6: Word Count (minimum 100 words) – 1 point possible
- My word count: _____ words
- My self-assessment score: _____ out of 1 point
Criterion 7: Proper Formatting – 1 point possible
- Is my title correct? (Yes/No): _____
- Required format: “Response Post to the Original Post by [First Name Last Name]”
- My self-assessment score: _____ out of 1 point
Criterion 8: Substantive Engagement (minimum 2 elements) – 3 points possible
- Element 1 included: _______________________
- Element 2 included: _______________________
- My self-assessment score: _____ out of 3 points
Criterion 9: Professional Tone – 1 point possible
- Is my tone professional and respectful? (Yes/No): _____
- My self-assessment score: _____ out of 1 point
Criterion 10: Writing Quality – 2 points possible
- Number of grammatical/spelling errors: _____
- My self-assessment score: _____ out of 2 points
RESPONSE POST SUBTOTAL: _____ out of 8 points
TOTAL SELF-ASSESSMENT SCORE: _____ out of 20 points
Graham, John and Campbell Harvey (2002). How Do CFOs Make Capital Budgeting and Capital Structure Decisions? Journal of Applied Corporate Finance 15 (1), 8-23.