Corporate Finance Assignment

This assignment discusses the importance of capital budgeting in financial management and analyzes a news article on Petronas' capital budgeting structure. It also recommends steps and techniques for proper capital budgeting.

Running head: CORPORATE FINANCE ASSIGNMENT
Corporate Finance Assignment
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Author Note

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Table of Contents
Introduction......................................................................................................................................2
News article review.........................................................................................................................2
Relevancy with the chosen fiance topic - Capital Budgeting.........................................................3
Recommendation.............................................................................................................................5
Conclusion.......................................................................................................................................5
References and Bibliography...........................................................................................................6

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Introduction
The issue that has been presented in the question is that a recent financial article has to be
chosen on one of the following accounting issues like the financial statements; equities market or
stock valuation; capital budgeting of a business entity; raising equity capital or cost of capital.
The particular topic that has been chosen for the purpose of analyzing in this particular study is
capital budgeting of a business entity.
Capital budgeting refers to the process of allocation of the funds to the capital projects
that have a longer life term. This particular study aims to look at the issues that the selected firm
in the news article is facing and an overview into the capital budgeting techniques that should be
utilized in order to prepare a proper capital budget.
The news article that has been chosen is a recent one as it dates back to August 15, 2017
and focuses on the issues that the firm faces in the absence of a proper capital budgeting
structure. To be more precise, the capital budgeting techniques and concerns in relation to the
long-term investments and finance decisions have been discussed.
News article review
The well-known state energy firm of Malaysia Petronas, has been in the news due to the
reason that the business firm has been selecting markets for the purpose of expansion. The state
oil-energy firm has taken up the decision to concentrate on the geographical position of the
company. It has been mentioned in the news article that the selected company, Petronas will be
focusing on South East Asia and Canada as because it has large amount of reserves in these
countries. Moreover, Petronas has been focusing on Mexico where the company has picked up
three blocks. The management of the corporate entity has also reduced the payment of the
dividends to the respective Government body. The organization has been expected to make a
payment of RM 13 billion in the current financial that is half the payout of the financial year for
2015. The dividends from Petronas, being one of the biggest employers of Singapore plays a

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major role in the economy, as the firm is one of the biggest employers of Malaysia. Furthermore,
the firm contributes majorly to the country’s revenue1.
The management of the firm further states that the capital budgeting facilitates the regular
updating of the portfolio of the firm. Moreover, this decision should not include any
consideration of the emotional attachments that may have been generated due to the long-term
relationship that has grown. Moreover, the corporate entity further states that the company has
carried on reviewing the ongoing investments that it has engaged into during the particular
financial year. The management of the corporate entity also has capital budgeting plans that
include business interests in more than fifty countries worldwide. The capital budgeting that has
been planned by the giant business entity also includes plans for executing the cost efficiency by
the firm. An instance of capital budgeting by the firm also includes a US$90 million project in
China while a floating liquefied natural gas facility that is a unique plant and is set to begin the
operations in the month of June.
Relevancy with the chosen finance topic - Capital Budgeting
Capital budgeting essentially refers to the process of making decisions by the corporate
entities in regards to the long-term decisions pertaining to the investment projects. It should be
noted here that the managers face difficulty in choosing projects from among a group of multiple
projects that are long term in nature. Capital budgeting aims to analyze each of the investment
projects by the consideration of the cash flows that are generated by the returns that are derived
from these investment projects. For instance, in case of Petronas, the firm may be able to devise
a useful portfolio by estimating the potential revenues that can be derived from the different
1 Leaner, meaner Petronas targets key markets for growth NST Online. 2018
https://www.nst.com.my/business/2017/08/268229/leaner-meaner-petronas-
targets-key-markets-growth

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projects. 2 The steps that are considered by the managers in selecting the relevant investment
projects are as follows:
 Identification of the projects that can be aligned with the strategy or planning of the
organization
 Gathering of the relevant information from all parts of the value chain in order to execute
the evaluation of the alternative projects
 The further identification of the cash flows that can be attributed to the alternative
projects
 The future yields from the alternative projects has also to be determined in order to
choose from the alternative projects
 Lastly, the investment is done in the selected project and the obtained returns and cash
flows are compared with the estimated ones in order to evaluate the usefulness of the
capital budgeting structure
Here, it should be noted that the capital budgeting structure by a business entity might
undertake the various techniques of capital budgeting like the payback period method;
discounted payback period method; net present value; accounting rate of return; internal rate of
return and profitability index. Payback period refers to the measurement of time within which the
desired returns are derived from the selected project. The Net Present Value refers to the initial
cash outflow less sum of discounted cash inflow. The Accounting Rate of Return refers to the
profitability of the project and the Internal Rate of Return refers to the discount rate at which net
present value of the project is zero3.
2 Dudin M, Kucuri G, Fedorova I, Dzusova S, Namitulina A. The innovative business model
canvas in the system of effective budgeting.
3 Williams EE. Investment, capital, and finance: corporate and entrepreneurial theories of the
firm. Can the Free Market Pick Winners?: What Determines Investment: What Determines
Investment. 2016 Sep 16.

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In case of the chosen company, the management of the company has been able to devise
the capital structure in such a way that it has been able to invest in various projects on a
worldwide basis. The firm incurring loss has been one of the major reasons that the management
has planned a cost efficient budget. Moreover, the reviewing of the portfolio regularly has also
enabled the management of the company to strengthen the portfolio of the company, which has
effectively resulted in a proper capital budgeting by the company4.
Recommendation
The particular recommendation in case of Petronas is that the firm should consider the
five mentioned steps in choosing projects for the purpose of expanding the business. The
relevant capital budgeting technique should also be considered by the firm in order to prepare a
proper capital budgeting structure. Moreover, the projects that have been undertaken by the firm
should also be properly analyzed and future returns from the firms should also be computed in a
proper way. This will enable the firm to operate in an efficient manner and derive the required
returns from the investment projects without having to consider the risks associated with such
investments.
Conclusion
The conclusion that can be derived from the discussion in the preceding paragraphs is
that capital budgeting is an important part of the financial management structure. The advantages
of capital budgeting facilitates the estimation of the investment option that results in the
preparation of an efficient capital budgeting plan. Moreover, capital budgeting also helps the
management of the firm in making an informed decision in regards to the investment that is
considered by analyzing all possible options.
4 De Visscher FM. Financing transitions: Managing capital and liquidity in the family business.
Springer; 2016 Apr 30.

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References and Bibliography
Chittenden F, Derregia M. Uncertainty, irreversibility and the use of ‘rules of thumb’in capital
budgeting. The British Accounting Review. 2015 Sep 1;47(3):225-36.
Cleverley WO. Essentials of health care finance. Jones & Bartlett Learning; 2017 Feb 15.
De Visscher FM. Financing transitions: Managing capital and liquidity in the family business.
Springer; 2016 Apr 30.
Dudin M, Kucuri G, Fedorova I, Dzusova S, Namitulina A. The innovative business model
canvas in the system of effective budgeting.
Gitman LJ, Juchau R, Flanagan J. Principles of managerial finance. Pearson Higher Education
AU; 2015 May 20.
Leaner, meaner Petronas targets key markets for growth NST Online. 2018
https://www.nst.com.my/business/2017/08/268229/leaner-meaner-petronas-
targets-key-markets-growth
Levin V, Hallgren A. The choice of capital budgeting techniques: a human capital approach.
Matthew BT. Financial management in the sport industry. Taylor & Francis; 2017 Feb 9.
Petty JW, Titman S, Keown AJ, Martin P, Martin JD, Burrow M. Financial management:
Principles and applications. Pearson Higher Education AU; 2015 May 20.
Rossi M. The use of capital budgeting techniques: an outlook from Italy. International Journal of
Management Practice. 2015 Jan 1;8(1):43-56.
Soltani S, Nayebzadeh S, Moeinaddin M. The Impact Examination of the Techniques of
Management Accounting on the Performance of Tile Companies of Yazd. International Journal
of Academic Research in Accounting, Finance and Management Sciences. 2014;4(1):382-9.
Williams EE. Investment, capital, and finance: corporate and entrepreneurial theories of the firm.
Can the Free Market Pick Winners?: What Determines Investment: What Determines
Investment. 2016 Sep 16.