Investments

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  Investments

  An Introduction

  • Herbert Mayo(Author)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  The difference in definition rests upon the aggregate change in productive assets that results from the investment. When firms invest in plant and equipment, there is a net increase in produc -tive assets. This increase generally does not occur when individuals purchase stocks and bonds. Instead, for every investment by the buyer there is an equal dis investment by the seller. These buyers and sellers are trading one asset for another: The seller trades the security for cash, and the buyer trades cash for the security. These transactions occur in secondhand markets, and for that reason securities markets are often referred to as secondary markets . Only when the securities are initially issued and sold in the primary market is there an investment in an economic sense. Then and only then does the firm receive the money that it, in turn, may use to purchase a plant, equipment, or inventory. In this text, the word investment is used in the layperson’s sense. Purchase of an t t asset for the purpose of storing value (and, it is hoped, increasing that value over time) will be called an investment, even if in the aggregate there is only a transfer of owner -ship from a seller to a buyer. The purchases of stocks, bonds, options, commodity con -tracts, and even antiques, stamps, and real estate are all considered to be Investments if the individual’s intent is to transfer purchasing power to the future. If these assets are acting as stores of value, they are Investments for that individual. Assets have value because of the future benefits they offer. The process of determin -ing what an asset is worth today is called valuation . An investor appraises the asset and assigns a current value to it based on the belief that the asset will generate cash flows (e.g., interest) or will appreciate in price. After computing this value, the individual compares it with the current market price to determine if the asset is currently over -priced or underpriced.

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  Advanced Engineering Economics

  • Chan S. Park, Gunter P. Sharp(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  PART 1 Basic Concepts and Tools in Economic Analysis 1 CHAPTER 1 Accounting Income and Cash Flow Alphabet Company (Google) invests a hundred million dollars in various artificial intelli- gence (AI) technologies. A vice president of the company may invest hundreds of thousands of dollars by purchasing shares of a newly formed company that manufactures smartphone chips. A human resource manager in the company may invest several thousand dollars in a time-sharing resort apartment. The marketing manager considers the investment of some bonus money in buying government bonds. The marketing manager’s secretary may invest savings in a federally insured savings and loan association. The secretary’s 12-year-old son buys savings certificates with the money earned through delivering the local paper; he hopes to buy a car. The secretary’s 3-year-old daughter deposits all the pennies she finds in a piggy bank in the hope that enough money will accumulate to buy her favorite candy. 1.1 WHAT IS INVESTMENT? What we just described are investment activities from the perspectives of the investors—an analogy similar to that introduced by Sharpe in his definition of investment [5]. A deposit in a savings account at a bank is an investment in the eyes of the depositor. Even cash stored in a piggy bank can be viewed as an investment—one yielding a penny for every penny invested, assuming no fire or theft. Each example involves the sacrifice of something now for the prospect of something later. And this, in the general sense, is investment. In exam- ining individual examples such as these, Professor Sharpe further notes that “We see two different factors involved, time and risk. The sacrifice takes place in the present and is cer- tain. The reward comes later, if at all, and the magnitude may be uncertain.” In some cases, the element of time predominates (e.g., government bonds). In others, risk (uncertain out- come) is the dominant factor (e.g., betting on a dog race).

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  Corporate Finance

  Economic Foundations and Financial Modeling

  • Michelle R. Clayman, Martin S. Fridson, George H. Troughton, Michelle R. Clayman, Martin S. Fridson, George H. Troughton(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 4 CAPITAL Investments John D. Stowe, PhD, CFA Ohio University (USA) Jacques R. Gagné, FSA, CFA, CIPM ENAP (Canada) LEARNING OUTCOMES The candidate should be able to: • describe types of capital Investments made by companies • describe the capital allocation process and basic principles of capital allocation • demonstrate the use of net present value (NPV) and internal rate of return (IRR) in allocating capital and describe the advantages and disadvantages of each method • describe common capital allocation pitfalls • describe expected relations among a company’s Investments, company value, and share price • describe types of real options relevant to capital investment 1. INTRODUCTION Capital Investments, also referred to here as capital projects, are Investments with a life of one year or longer made by corporate issuers. Issuers make capital Investments to generate value for their stakeholders by returning long-term benefits and future cash flows greater than the associated funding cost of the capital invested. How companies allocate capital between competing priorities and the resulting capital investment portfolio are central to a company’s success and together constitute a fundamental area for analysts to understand. Given that corporate disclosure of capital Investments is typically very high level and lacking in specifics, the evaluation of a company’s capital Investments is often challenging for analysts. Capital Investments describe a company’s future prospects better than its working capital or capital structure, which are often similar for companies, and provide insight into the quality of management’s decisions and how the company is creating value for stakeholders. 109

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  Financial Accounting

  Tools for Business Decision-Making

  • Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine(Authors)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  This in turn will provide our shareholders with a new source of incremental earn- ings beginning in year one, and a new deposit base to further diversify our funding,” said Scotiabank President and CEO Rick Waugh, at the time the acquisition was announced. These strategic Investments have additional benefits in allowing Scotiabank to diversify into different revenue streams and leverage its existing business since the acquired company may have products that would be of interest to existing customers. In fact, there are many reasons and ways by which organizations make Investments, whether they are non-strategic Investments to earn a higher return on extra cash than from a bank account, or strategic Investments to influence or control another company, such as a competitor, supplier, or complementary business that their customers may benefit from. 1 ACCOUNTING MATTERS! 612 C H A P T E R 12 Reporting and Analyzing Investments Investments can be made by purchasing equity securities issued by corporations or by purchasing debt securities issued by corporations or governments. Investments can be either non-strategic, where the goal is to generate investment income, or strategic, where the goal is to influence the deci- sions made by the company invested in. As you will see in the chapter, the way in which a company accounts for each of its Investments is determined by several factors, including whether the invest- ment is non-strategic or strategic. The chapter is organized as follows: Classifying Investments Recall that in Chapter 8 you were introduced to the concept of financial assets. These are assets that consist of cash and other assets such as receivables and Investments that have a contractual right to receive cash. It is common practice for corporations to purchase financial assets, such as debt and equity Investments, for investment purposes.

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