Question
How would you define the process of allocating a
limited capital budget between different projects in a way that maximizes shareholder wealth?Solution
When a company has limited budget or capital available, it would have to choose between various independent projects. The company will choose such projects that will contribute maximum to shareholder value. For example, if there are 2 independent projects with NPV of Rs.3000 and Rs.5000 respectively, the company will allocate more capital to the project with NPV of 5000.
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