Financing Working Capital
Current assets less current liabilities equals working capital. $$\text{Working capital = Current assets – Current liabilities}$$ A company’s short-term assets and obligations are managed through working capital management. Its objective is to prevent excess reserves that might be expensive and,…
Relationship among a Company’s Investments, Value, and Share Price
If a business can make an investment that generates more revenue than its opportunity cost of capital, the investment is beneficial to all parties involved and is, therefore, viable. An investment might reduce stakeholder value, i.e., it might generate less…
Capital Allocation Pitfalls
Some of the common capital allocation pitfalls or mistakes are: Inertia By comparing the current capital investment to the amount from the previous year and the return on investment, analysts can determine the presence of inertia. An analyst should evaluate…
Net Present Value (NPV) and Internal Rate of Return (IRR)
Several important decision-making criteria are used to evaluate capital investments. The two most comprehensive and well-understood measures of whether or not a project is profitable are the net present value (NPV) and the internal rate of return (IRR). Other measures…
Process and Principles of Capital Allocation
Capital allocation describes the process companies use to make decisions on capital projects, i.e., projects with a lifespan of one year or more. It is a cost-benefit exercise that seeks to produce results and benefits which are greater than the…
Types of Capital Investments Made by Companies
Capital investments are undertaken to either maintain the existing business or/and grow it. There are four main types of capital investments: Going concern (or maintenance) projects. Regulatory or compliance projects. Expansion projects. Other projects. While growth projects and other projects…
International Organizations
The global trade decline in the 1940s had some negative impacts. The living standards of people fell, and unemployment became a chronic issue. Due to this, there was a need to create international organizations to oversee economic relationships among countries….
How Decisions Affect Balance of Payments
Balance of payments has a great impact on the movement of exchange rates and international trade. When a country is faced with trade deficits, it’s likely to experience a fall in its reserves and a depreciation of its currency. As…
Balance of Payments Accounts
A balance of payments is a combined account of receipts and payments to and from other nations that arise from economic activities undertaken annually. According to C.B Kindleberger, “the balance of payments of a country is a systematic record of…
Objectives of Capital Restrictions
Capital restrictions are the measures that governments or central banks take to control the flow of foreign money in and out of a country’s economy. Government controls include tariffs, taxes, volume capital restrictions, etc.
