Working Capital – Meaning, Types, Needs, Sources and Calculation | Management Notes

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Working Capital

What is Working Capital

A working capital is another component of the capital that the business needs to meet its day-to-day requirements. Payments to creditor, salaries to workers, raw material purchases, etc., are generally recurring in nature. They can be easily converted to cash. Hence, short-term capital is also known as working capital. A key aspect of financial management is the management of working capital. Short-term finance is primarily concerned with the liquidity and profitability of the business concern. Working capital management helps business concerns improve their operating performance, as well as meet their short-term liquidity needs.

Therefore, it is not only a part of financial management but also the overall management of a business concern to study working capital management. According to the definition, working capital refers to the capital that is not fixed but it is usually defined as the difference between current assets and current liabilities.

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Types of Corporate Bond – Long-Term Debt Instruments | Financial Management

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Types of Corporate Bond

Types of Corporate Bond 

A bond is a long-term contract under which a borrower agrees to make payments of interest and principal on specific dates to the holders of the bond. It is long-term debt security or long-term promissory note having a maturity period of more than one year. Bonds are issued by corporations and government agencies that are looking for long-term debt capital. The borrower of the securities promises to pay fixed periodic interest till the maturity period and at the end maturity value or face value as well.

The interest payment is called coupon payment. In the issuance of a bond the legal document indenture is prepared which specifies the right and duties and all the terms and conditions related to bonds. The indenture also specifies the rights and responsibilities of the trustee.

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Organizational Structure and Management – Nepal Rastra Bank (NRB) | Central Bank

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Organizational Structure and Management of Nepal Rastra Bank

Organizational Structure and Management of Nepal Rastra Bank

It is important to understand the organizational structure and management of Nepal Rastra Bank since it has an indirect effect on the economy. According to Nepal Rastra Bank Act and its preamble, it must operate and operate in accordance with these provisions. Organizational structure as well as management are two critical aspects that must be considered:

  • The total responsibility of the Bank shall lie in the board of directors.
  • The Board shall make rules for the conduct of business.

NRB’s policy-making board of directors is its most important component. A board of directors has ultimate authority in NRB. As a result, Nepal Rastra Bank’s Board of Directors (BOD) formulates policy and regulations at the highest level. To protect the economy from financial and monetary instability, the Board formulates and implements financial and monetary policies in accordance with the vision, policies, and programmers of government.

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Monetary Policy Tools – Federal Reserve System | Investment Analysis

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Monetary Policy Tools

Monetary Policy Tools 

Federal Reserve System which is also called “The Fed” is the central bank of the United States (US) and is considered to the world’s most powerful financial institution. Fed was established after the US economy was repeatedly hit by financial panics and severe economic disruptions. Fed is the main regulator for the financial institutions of the country that holds the power to ensure the financial stability in the system (CHEN, 2020).

The major purpose behind founding Fed is to provide the country with a monetary and financial system that is safe, flexible, and stable. Some of the responsibilities of the Fed are as follows:

  • Managing Money supply and credit in the economy.
  • Regulation and Supervision of financial institutions for maintaining stability.
  • Through various depository institutions (banks, credit unions, etc.) it provides payment services to the public.

Federal Reserve uses monetary policy as a toolkit to control the money supply in the economy, to achieve sustained and high growth rates as well as to maintain low inflation rates. Depending on the assessments made by the policy-makers, the effectiveness of monetary policy can be analyzed. Monetary policies can either be Contractionary or Expansionary depending upon the money supply requirement in the economy.

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Security Market Line (SML) – Capital Assets Pricing Model | Investment Management

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Security Market Line (SML)

Security Market Line (SML)

Security Market Line Meaning

The security market line is the graphical representation of the capital assets pricing model. The model SML is a graph or line that shows the relationship between the risk-adjusted required rate of return of risky assets and systematic risk measured by beta coefficient. Security Market Line(SML) is the graphical representation of CAPM which shows the relationship between the required return on individual security as a function of systematic, non-diversifiable risk. Security Market Line(SML) measures the risk through beta, which helps to find the security’s risk contribution to the portfolio. 

Security Market Line has asset-pricing implication for both portfolios and individual securities. The securities lying above SML is said to be underpriced as it indicates that return from the security is greater than what is required to compensate for systematic risk associated with the security. Similarly all the securities lying below SML is considered to be overpriced as it fails to give sufficient return to compensate against the systematic risk of the security.

On the basis of asset-pricing implication show by SML , investors prefer to buy all underpriced securities and sell overpriced securities. The logic of the SML or CAPM equation is that the required return on any investment is the risk-free return plus a risk adjustment factor. The risk adjustment factor is simply the risk premium required for market return ,multiplied by the riskiness of the individual security. 

The slope of Security Market Line reflects the degree of risk aversion on the part of the investors. If the degree of risk aversion is higher for average investors, the slope of security market line is relatively steeper. As a result, risk premium on any security will be larger and consequently the required return will also be higher.

Illustration,

Suppose the risk-free rate of return is 6%, the expected rate of return on the market is 15 percent, the beta of asset A is 0.5 and the beta of asset B is 1.5. Calculate the required rate of return for each asset.

Solution:

  • Rm = 15 %
  • Rf = 6%
  • βA= 0.5
  • βB= 1.5

RA = 6+ (15-6) × 0.5 = 10.5

RB = 6 + (15-6) × 1.5 = 19.5

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Term loan – Characteristics of Term Loan | Advantages and Disadvantages

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Term loan

Term loan 

Term loan Meaning

The term loan is a type of loan in which repayment is made on a periodic installment basis which includes principals and interests that have a maturity period of more than 1 year but generally less than 10 years. It is a formal loan that means a loan arranged from formal negotiation with banks and financial institutions.

Formal negotiation includes a formal contract having required information and term and conditions like; maturity period, interest rate, collateral, and payment process along with the date. A series of payments are made periodically on this type of loan until the loan is fully amortized. Term loan funds are normally used for purchasing fixed assets or discharging other loans.

Term loans are advantageous for the firm because of lower cost than the cost of equity, lower processing cost, flexible negotiation, etc. Here we are going to analyze from the borrower’s perspective not via the lender perspective.

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Types of Dividends – Meaning, Examples, Advantages, Disadvantages, Methods | Accounting for Dividend

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Types of Dividends

Dividend

Dividends are distributions of company earnings to a class of shareholders, as decided by the company’s board of directors. In general, dividend-paying stocks are eligible as long as the shareholders own them before the ex-dividend date. Whenever a company generates a profit and accumulates retained earnings, these earnings can either be reinvested in the business or paid out as dividends to shareholders. Dividend yield is calculated by dividing dividend per share by share price.

Shareholders must approve dividends through their voting rights. The most common dividend is cash, but dividends can also be issued as stock or other property. In addition to companies, mutual funds and exchange-traded funds (ETFs) pay dividends. Dividends are an incentive for shareholders to invest in the stock of a company and are usually paid out of the company’s net profits. Most of the company’s profits are retained as retained earnings, which represent the money that will be used for the company’s ongoing and future operations; the remainder can be distributed as a dividend to shareholders. When a company does not make the necessary profits, it may still pay dividends. Their goal may be to maintain their established track record of making regular dividend payments.

Various payout rates and timeframes are available to directors when it comes to issuing dividends. It is possible to pay dividends on a schedule, such as a monthly, quarterly, or annual basis. Walmart Inc. (WMT) and Unilever (UL) are two companies that offer regular quarterly dividends.

A dividend is the distribution of profit or the portion of net income paid out to shareholders. It is paid to shareholders in cash or stock for making investment and bearing risk. Dividend distributions are generally based on accumulated profits, i.e. Dividends are not an expense on income statements; they are liabilities at the time of declaration. If a company has sufficient and adequate retained earnings dividends may be declared. Dividends are not an expense on income statements; they are liabilities at the time of declaration.

Corporations usually pay dividends in cash, but they can also distribute shares of their own capital shares as dividends. An asset or merchandise is paid out as dividends by the company. Dividends are the means by which shareholders of a corporation share in its earnings, accountants charge them to retained earnings. Dividend policy is simply concerned with determining the portion of a firm’s earning into dividends and retained earnings in the firm.

Some of the various types of Dividends are explained below:

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Nepalese Investment Environment – Investment Management | Finance MCQs

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Nepalese Investment Environment

Nepalese Investment Environment | Investment Management | Finance MCQs Investment environment refers to those forces, factors, or variables that directly or indirectly affect investment activities. Factors that affect the selection of investment alternatives, as well as the overall investment process, can be described as follows: A. Securities The evidence of property rights or claim on … Read more

Risk Return Trade Off – Investment Environment | Finance MCQs

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Risk Return Trade Off

Risk Return Trade Off | Investment Environment | Finance MCQs A concept which states that there is a positive relationship between risk and return is called risk-Return trade-off. Risk returns trade-off shows the relationship between the expected rate of return on a portfolio and the systematic risk of a portfolio. Risks return trade-off deals with … Read more

Investment Process – Steps Involved while making Investment | Investment Environment

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Investment Process

Investment Process | Steps Involved while making Investment | Investment Environment | Finance MCQs Step 1 : Setting Investment Objective The investment objective is the motive of investors that stimulates the investors to invest in any investment alternatives. Investment Objectives should be stated in terms of both risks and return preference. Affecting factors of the … Read more