Question: Smith Inc is a public company but is tightly controlled
Smith Inc. is a public company but is tightly controlled by Joe Smith, the grandson of the founder. Smith is quite confident about his ability to evaluate investments in all aspects of the business. The situation at Smith Inc. is quite different from that at Jones Inc., although they share a similar line of business. Jones Inc. has a much less powerful CEO, who delegates much more control to the heads of the firm’s various business units. In fact, Fred Jones, the company’s CEO, meets with the heads of the business units, and they make capital allocation choices as a group. Discuss how and why Smith Inc. and Jones Inc. might have different approaches for determining the discount rates used to evaluate their projects.
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