What are the assumptions underlying this model for Working Capital Management strategies?
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Working capital is a valuation metric that is calculated as current assets minus current liabilities. Working capital is also known as operating capital. \nIn general terms, there are two main approaches, which are opposite but complement each other in some ways, to strategic management:\n\nThe Industrial Organization Approach \nbased on economic theory — deals with issues like competitive rivalry, resource allocation, economies of scale \nassumptions — rationality, self descipline behaviour, profit maximization \nThe Sociological Approach \ndeals primarily with human interactions \nassumptions — bounded rationality, satisfying behaviour, profit sub-optimality. An example of a company that currently operates this way is Google
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I think we may be mixing terminology here. It's not ROI.  Firms look at capital from either retained earnings (profits) borrowed money, or capital from investors.  The "cost of capital" is what the ownership demands from its investment. This is viewed as a cost from the firms' point of view. \n  A lot of equity traders use the idea of "cost of capital" as if they were borrowing money to invest in operations-like using margin in a brokerage account.\n  \nThink about the term.  "Cost of capital" means how much are you paying to use this money.  So, if you borrow at 10%, and are gaining 11%...your cost of capital would be 10%.\nAnd if you are gaining 2%, your cost of capital is..........still 10%.\n\nDoesn't matter that you're getting skinned alive and losing 8%.
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First of all work out the current expenditure and income, also look at past patterns.\n\nThen work out, if the company increases such and such - how much will income rise, if they have to spend or invest - how much will expenses rise....\n\nThat's it - that's a forecast
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I think the best source for an overview of this information is Adrian Slywotzsky's best selling book - the Profit Zone.  This was required reading in my MBA program.  The Profit Zone has write ups on 22 different profit models - each of which is somewhat unique for depending on its business model. For example "Specialization Profit" takes different approaches that "Relative Market Share Profit."  This is a great book, easy to read, with a lot of visual content that will help you understand the concepts.
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Investopedia is a decent web site.\nwww.investopedia.com\n\nCurrent ratio (current assets/current liabilities) is a ratio that basically shows whether a company has enough liquid capital to pay what they owe in the next 12 months.  A current ratio of less than 1.0 is generally seen as a red flag indicating that the company will need to raise more capital to pay for their liabilities in the short term. It is a shortcut ratio rather than the definite cause-effect ratio. \n\nWorking capital is not a ratio, but a balance.  Working capital definitions vary, but it is generally cash, inventory, accounts receivable less accounts payable and accrued payables. Basically, this is the capital needed to keep the business running.  If you are a service (e.g. consulting), you generally need very little working capital, but inventory-based businesses need capital to stock the shelves and finance that gap between paying your suppliers and getting paid from your distributors. \n\nAsset turnover is Revenues/Avg. Assets.  This is a "capital velocity" ratio that shows how much money you bring in on the revenue side compared to how much capital you have put to work.  It is a somewhat meaningless ratio by itself, but becomes much more relevant when combined with "return on sales".\n\n"Return on sales" is not a common term.  It is usually called "net profit margin".  This is net profit/revenues and shows how much money equity shareholders earn on every dollar brought in on revenues after paying off all expenses.  When combined with Asset Turnover ratio, it gives you return on assets [(Return on sales) x (Asset Turnover) = Return on Assets].  This shows you how much money you are making on the capital invested.  For example, if you are getting 5% Return on Assets, you might be disappointed as bond holders might expect 5-8% returns while equity holders usually want 11-20%, depending on the risk of the business.  In other words, if a business does not return the cost of capital, it is probably a bad business.
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In this example you have $10,000,000.00\n\nYou invest $5,000,000.00 in the stock market with the help of a portfolio manager and you reinvest half of your profits and give away the rest to your family.\nIf you get a 10% return you reinvest $250,000.00 and you give away to your family $250,000.00 \nIf you get a 20% return you reinvest $500,000.00 and you give away to your family $500,000.00\n\nThis way you HAVE MORE MONEY EACH YEAR. Therefore you never run out of money.\n\nKeep in mind that with a $5,000,000.00 portfolio you can afford a very expensive portfolio manager that hopefully will protect your money against bad investments and market crashes and war. Therefore there is a very low probability that you will lose money in a year.\n\nEven if you lose, say 20% in the first year. You still have $4,000,000.00 to make more money in the future. (If that happens fire your portfolio manager)\nWhen a bad year ends (Losses) you only give away to your family a minimum wage salary to survive that year or they could survive on credit for an entire year and when the next year comes they pay off all debts or a combination of both.\n\nThe other $5,000,000.00 goes to start a Company (You could easily start 50 $100,000.00 small businesses or 5 $1,000,000.00 medium size businesses)\n\nLike before you reinvest half of the profits in the company and the rest goes to your family.\n\nYou hire 50 managers to run your small businesses or 5 manager to run your medium size businesses and you live your life.\n\nThe key is not to spend $5,000,000.00 to buy a house in Beverly Hills or $250,000.00 to buy a Ferrari because if you burn your money at that rate you will go broke within 3 years. Just like most Actors or Singers.\n\nThere is nothing wrong with a $250,000 Ferrari or a $5,000,000.00 House. \nJust buy them WITH YOUR PROFITS. (Take $125,000.00 from your company and $125,000.00 from your stock market profits and buy it)\nIf you did not make enough to buy it. You could save and buy it the next year.\n\nWealth Management is a very complex subject.\nDrop me a line if you need more detailed advice.
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No. Because it is based upon assumptions or I should say assumptions of assumptions. 1. risk free rate of return 2. beta (which is calculated based on historical data not what is likely to happen in the future) and 3. expected market return (just a guess). \n\nA usefull tool for Ph. D. to write about and that is about it.
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I think you are refering to option pricing models.\nYou want to search online for real option theory that lets you build models for build-vs-buy decisions. I have attached a link for starters, you can also look in Wikipedia for Black-Scholes option pricing model to get an introduction to it.
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I am a little confused with your wording but if you mean what you think I mean then all your figures are assumed. You project what your expenses & income will be by doing research & deciding what you think will determin the businesses inflow & outflow.\nNothing is exact in business regarding financials in the first year, possibly the first 3 years.
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It means the model or base assumption under which the business (or any other continuing enterprise) operates.  It can be unconsciously adopted, that is, not recognized by those founding or running the business.  \n\nThe phrase is also used in fields other than business.
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Working capital is a true measurement of how much cash the operation is generating and thereby has available for reinvestment.  Liquidity can change dramatically as a function of account receivable collection, inventory reduction and cash management.
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In a fore gone era, people could work at one company and retire with a comfortable retirement fund. Are the retirement plans of today as assured as those in the past? I will compare the old with the new and talk about how Cash Balance Plans improve retirement security for todays workers.
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There's actually some debate about this.  Traditional wisdom says that high interest rates lower capital outflows and low interest rates increase it.  But if the raising of interest rates comes close to a possible default, the risk premium will make the capital account worse off.
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Financing is bringing money (usually cash) to the firm.  With a larger cash reserve, the company will have more liquid assets.\n\nThe firm could also take out a large revolver at a bank and this type of financing would help to ease the uneven cash flows for a cyclic industry and help increase liquidity.
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C.\n\nThe risk will determine how much is too much risk.  If the firm is cyclic, then the amount of debt should be lower so that the firm can still make interest payment during the down times.\n\nThe tax structure determines the amount of tax shield and also factors into the optimal capital structure.  More tax means more debt.\n\nEdit: By the way, Mark, I've gone through your papers a few years back and they were rather interesting.  I would have sent an email, but you don't have your up here on Answers and I didn't really want to invade your privacy by going through other channels.
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Heh, I knew I'd heard of this HBS case before.  I'm pretty familiar with Kevin Rock, too.  Unfortuntately, I don't remember this exact case much since it's been so long.\n\nUsually on these HBS cases, they don't expect you do come up with anything novel or new.  They really care more about financial analysis that you'll probably have to do in the B case, if you have to do that.  I don't have the case handy, but really all you have to do is read it carefully and summarize what's in there.\n\nFor M&A, it usually comes down to synergies if they're in the same business.  Other things to consider might be the optimal capital structure of the newly formed companies and how they might benefit from tax savings.
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If you want to play games with your financial future, which is what you are proposing here, at minimum a course in math/ financial calculations could help.  A meeting with your banker could help you understand the current rates if any that they could offer to you for your proposed project, and what conditions would be imposed on such a loan.\n\nNo, it does not sound to me as if this is an advisable plan.  It seems that basic business knowledge is missing. This can cause severe problems for the plan.