MGT Notes

Corporate Finance – Ross et al, 12e, Pg 2

Capital Budgeting is a process that aims to answer the question of what long term assets should a firm invest in. This refers to the left side of the Balance Sheet and deals with making and managing expenditures on long lived assets. The type and proportion of Capital Expenditures depends on the nature of the business.

Capital Structure represents the way in which the firm has raised cash for its capital expenditure. This refers to the right side of the balance sheet and it outlines the proportion of a firm’s financing from short- and long-term debt and equity.

Net Working Capital is a concept that demonstrates how a firm manages short term operating cash flows. This occurs on the upper portion of the balance sheet. Since the timing of incoming and outgoing cash flows is uncertain, it is important to manage gaps in cash flow. This is done through Net Working Capital, and it is equal to the difference between current assets and current liabilities.