such a scenario by effectively managing cash flow, cash balances, inventory, accounts payable, and accounts receivable. In this paper, the working capital structures of two companies are compared: Costco Wholesale Corporation (Costco) and Microsoft Corporation (Microsoft). The former is a retailer while the latter is a technology firm.
Working capital has three major components: accounts receivable, inventory, and accounts payable (Sagner, 2010). Accounts receivable are part of the company's current assets. They basically denote cash the company expects to receive in the short-term as a result of products or services delivered to a customer. Accounts payable on the other hand are part of the company's current liabilities. They refer to the… Continue Reading...
like Amazon are a behemoth right now, there was a time where their operations and capital structures were quite thin internally and thus they needed a lot of investment and support through the capital investment and budgeting process.
Analysis
There are definite variations and differences when it comes to capital budgeting and resource allocation. Amazon typifies one of the outliers that exists. Of course, that would be the valuation and other fiscal perceptions related to internet companies. The “dot-com bubble” that happened around 2000 proves that there has been some blowback and static when it comes to the proper valuation of internet companies. It is… Continue Reading...
still affected by it, because it means that equity capital has a higher cost of capital than debt. When weighing capital structure decisions, cost of debt is one of the considerations that senior management needs to take into account, because a higher cost of capital essentially demands that the company earn higher returns. This makes sense for a company on a positive growth trajectory, but has its own challenges should the company no longer be growing.
If the company chooses debt, however, it must make the repayments on schedule, and that includes the interest payments. Debt may have a lower cost to it than equity, but it creates more of… Continue Reading...
Theories on How Companies Deal With Debt and Financial Distress
Companies can use two popular theories to conceptualize their capital structure. Pecking Order (POT) and Trade-Off (TOT) are always used interchangeably when proving organizations are seeking to ease their way of making capital structure decisions. The following study elucidates the differences between the two theories.
The Pecking Order vs. Trade-Off
The Trade-Off Theory refers to the concept that a company chooses how much equity finance and how much debt finance to use through balancing the benefits and costs (Agarwal, 2013). This theory explains that organizations are often financed partly with equity and partly with debt. Pecking Order Theory argues… Continue Reading...
Key areas that the finance team must consider are optimal capital structure, foreign exchange exposure, and controls. Much of the following explanation of the finance function will focus on these key subject areas.
Risk Management
Risk management in finance encompasses a lot of different things. The most basic concept is that most risk from a corporation’s perspective is financial. Risk reflects what might happen to the company’s valuation. Valuation is subject to a lot of unknowns, and these unknowns carry with them a downside. Risk management seeks to balance the need to grow, with the need to minimize downside risk.… Continue Reading...
