The two most influential theories of capital structure are the tradeoff and pecking order theories. The first, the tradeoff model, argues that companies trade off the benefits of additional debt (tax deductibility of interest expenses, reduced agency costs of free cash flow) against the costs (bankruptcy risk) and at the margin equate the two. The […]
There are many methods for the firm to raise its required funds. But the most basic and important instruments are stocks or bonds. The firm’s mix of different securities is known as its capital structure. A natural question arises: What is the optimal debt-equity ratio? For example, if you need $100 million for a project, should […]
There are three attributes for NPV, making NPV is a popular approach to investment decision making. a) NPV uses cash flows: cash flows from a project can be used for other corporate purpose (e.g., dividend payments, other capital-budgeting projects, or payments of corporate interest). By contrast, earnings are an artificial construct. While earnings are useful […]
Generally speaking, there are five steps taken when you make investment decisions: a) Investigation and research: investment environment analysis, market research and technology ability analysis b) Analysis and forecast: there are two methods to do the investment amount forecast, they are forecasting item by item and index estimate method. c) Decision making: decisions can be […]
Asset allocation refers to the strategy of dividing your total investment portfolio among various asset classes, such as stocks, bonds and money market securities. Essentially, asset allocation is an organized and effective method of diversification.
Long-term “investment policy” is usually established based on the investor’s long-term objectives and constraints of the investor. The return objective is the key variable. A high return objective can only be obtained by investing in asset classes with a higher return. Based on historical experience, without constraints, equities have by far the highest return. An […]
a) Unsecured loans. The most common way to finance a temporary cash deficit is to arrange a short-term unsecured bank loan. b) Secured borrowing. Banks and other finance companies often require security for a loan. Security for short-term loans usually consists of accounts receivable or inventories. c) Other sources. There are a variety of other […]
Actually there is no definitive answer. Several considerations must be included in a proper analysis: a) Cash reserves. The flexible financing strategy implies surplus cash and little short-term borrowing. This strategy reduces the probability that a firm will experience financial distress. Firms may not need to worry as much about meeting recurring, short-run obligations. However, […]
If a firm has a temporary cash surplus, it can invest in short-term marketable securities. The market for short-term financial assets is called the money market. The maturity of short-term financial assets that trade in the money market is one year or less. Most large firms manage their own short-term financial assets, transacting through banks […]
The target cash balance involves a trade-off between the opportunity costs of holding too much cash and the trading costs of holding too little. If a firm tries to keep its cash holdings too low, it will find itself selling marketable securities (and perhaps later buying marketable securities to replace those sold) more frequently than […]
