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Volume :16 Issue : 3 1988      Add To Cart                                                                    Download

The Effect of Capital Structure on Evaluating Capital Investment Projects and the Role of Accounting Information

Auther : Mohamed Ahmed EL-Azma

In recent years, financial management theory has emphasized the importance of taking into consideration the method by which the investment is to be financed when analyzing capital investment projects. However, current accounting literature on capital budgeting largely follows the traditional approach of assuming the separation of the capital investment and financing decisions.

The objective of this paper is two fold. First, to demonstrate the shortcomings in the accounting approach to defining the role and type of accounting data needed for capital budgeting decisions. It was shown that the Net Present Value (NPV) rule, using the weighted average cost of capital, is not in general consistent with the objective of shareholders’  wealth maximization unless dept-equity ratio is held constant. In addition, data specification as delineated in accounting literature does not in general allow for the application of alternative capital budgeting techniques which attempt to overcome the problem in using the NPV rule. Second, to extend the role of accounting information in capital budgeting decisions in the light of implications derived from the literature on the interaction between investment and financing decisions and agency theory. It was shown that the objectives of internal and external accounting information as well as the type of data required for planning and monitoring performance may be affected by such an interaction.

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