INVESTMENT STRATEGY FOR A SMALL GROWTH COMPANY*

The purpose of this article is to illustrate the impact of the simultaneous investment-financing decisions required by a small growth company when accepting relatively large investment projects. By such illustration, the capital budgeting rationale for using “rules of thumb” will be clarified, and correspondingly, the implicit assumptions for approximating a company's “cost of capital” will be exposed. To provide quantitative estimates of the various impacts of different capital budgeting strategies, a relatively simple simulation model was constructed. Once the implicit assumptions are exposed, the importance of a strategy combining the rules of thumb and cost of capital criteria is evident. It is believed that this combined strategy provides a practical bridge between the “art” and science of finance.     

ASYMMETRIC LOSS FUNCTION AND OPTIMAL POLICY UNDER UNCERTAINTY: A SIMPLE PROOF

Given an asymmetric quasi-convex loss function and a symmetric quasi-concave probability density function, both continuous, an extremely simple proof is suggested that shows that a policy maker will minimize expected loss by choosing a policy value on the less-damaging side of the loss function. This proof, which is compatible with a wide variety of loss functions and probability density functions, is extended to include cases where a symmetric loss function is matched against an asymmetric probability density function and where an asymmetric loss is matched with an asymmetric probability density function.