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Capital Allocation Method

The document defines capital allocation as the process of dividing financial resources among business functions or departments. The goal is to maximize output per money spent. Primary mechanisms for capital allocation include paying dividends, purchasing shares, and investing in growth. Management must consider factors like stock price, expected return, and tax rates. Capital allocation amounts must be accepted, stable over time, and not negatively impact other segments. Risk measurement is important in proportional capital allocation. Financial markets help allocate capital by attracting investor funds and channeling them to enterprises. Reasons for choice of allocation method include ease of application and interpretation.

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70 views13 pages

Capital Allocation Method

The document defines capital allocation as the process of dividing financial resources among business functions or departments. The goal is to maximize output per money spent. Primary mechanisms for capital allocation include paying dividends, purchasing shares, and investing in growth. Management must consider factors like stock price, expected return, and tax rates. Capital allocation amounts must be accepted, stable over time, and not negatively impact other segments. Risk measurement is important in proportional capital allocation. Financial markets help allocate capital by attracting investor funds and channeling them to enterprises. Reasons for choice of allocation method include ease of application and interpretation.

Uploaded by

PhilipGeorge
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Presented by:

Hisham ibnu hamza k


Roll no.21
Sem:7
Definition: The process of dividing financial
resources among several business functions or
departments

Goal of capital allocation: Maximize output per


money spent
Primary mechanism for capital allocation
include
 paying dividends
purchasing shares on the open market
investing in growth or sustaining operation of the
business

In deciding between these mechanisms,


management must consider a wide range of
factors;
1. the current stock price
2. The expected return on the equity
3. Tax rate to share holders
Must be accepted within the organization
Sum to the total capital of the organization
Stable over time
Allocation not affected by other business segment
No negative allocation
Appropriate for particular application
For creating share holder value company
management are responsible for return on capital
So the allocation of capital is proportional to risk of
activity
Risk measure is an important process in capital
allocation
Total risk must be defined
It is called as Allocating by a risk measure
Containing two table
First table contains risk measures that could be
used in capital allocation and second table contains
different allocation method
the total capital is expressed as the risk measure
for the entire company
Investors want to earn the highest return possible
for a level of risk that they are willing to take.
So simplest way to examine this is to consider 2
assets; risky assets and risk-free assets
A risk-free asset that has a low rate of return but no
risk
A risky asset that has a higher expected return for a
higher risk
It is a graph created by investors to measure the risk
of risk and risky free assets
Graph displays the return to be made by taking on a
certain level of risk
One of the main function of financial market is to
allocate the capital
Financial market attract funds from investors and
channel them to enterprises
FRANKFURT BOND MARKET
 is an example of financial market that allocate the
capital
Reason for capital allocation should drive the choice
of method

Ease of application

Ease of interpretation
Hunter Hall Global Value Limited
The portfolio is managed jointly by Chief Investment
Officer and James Deputy Chief Investment Officer and
Fund Manager. They are supported by a team of
experienced investment

HHV primarily invests in companies listed on the


Australian and international stock exchanges. It has a
bias to small and mid-size companies
THE END

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