13.1 Can Financing Decisions Create Value?Earlier parts of the book showed how to evaluate projects according to the net present value criterion. The real world is a competitive one, where projects with positive net present value are not always easy to come by. However, through hard work or through good fortune, a firm can identify winning projects. For example, to create value from capital budgeting decisions, the firm is likely to
Though the procedure for evaluating financing decisions is identical to the procedure for evaluating projects, the results are different. It turns out that the typical firm has many more capital expenditure opportunities with positive net present values than financing opportunities with positive net present values. In fact, we later show that some plausible financial models imply that no valuable financial opportunities exist at all.
Though this dearth of profitable financing opportunities will be examined in detail later, a few remarks are in order now. We maintain that there are basically three ways to create valuable financing opportunities: