physical capital

(noun)

In economics, physical capital, or just capital refers to a factor of production (or input into the process of production), such as machinery, buildings, or computers.

Related Terms

Examples of physical capital in the following topics:

  • Role of Financial Markets in Capital Allocation

    • One of the main functions of financial markets is to allocate capital, matching those who have capital to those who need it.
    • One of the main functions of financial markets is to allocate capital.
    • Capital markets especially facilitate the raising of capital while money markets facilitate the transfer of liquidity, matching those who have capital to those who need it.
    • When a company borrows from the primary capital markets, often the purpose is to invest in additional physical capital goods, which will be used to help increase its income.
    • Long-term capital can come in the form of shared capital, mortgage loans, and venture capital, among other types.

  • A Bank's Balance Sheet

    • We study the business of banking by examining a bank's assets, liabilities, and capital.
    • Capital equals total assets minus total liabilities.
    • Capital has many names, such as net equity, net worth, or net assets.
    • Finally, the remaining bank's assets earn no interest and include physical capital, such as the bank's buildings, computers, and other equipment, which totaled roughly $1 trillion.
    • Bank's net worth or capital becomes the last item on the bank's balance sheet.Capital equals total assets minus total liabilities.All banks organize themselves into corporations.

  • Other Considerations in Capital Budgeting

    • Traditional capital budgeting theory holds that investments should be made when the simple net present value (NPV) of an investment opportunity equals or exceeds zero.
    • The option is "real" because the underlying assets are usually physical and human assets rather than financial securities.
    • Availability and recognition of this option will increase a firm's propensity to invest relative to what would be suggested by a simple NPV rule, which assumes that the investment project continues for its physical lifetime and omits the possibility of future divestment.

  • The Marginal Cost of Capital

    • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
    • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
    • Generally we see that as more capital is raised, the marginal cost of capital rises .
    • The Marginal Cost of Capital is the cost of the last dollar of capital raised.
    • Describe how the cost of capital influences a company's capital budget

  • Decision Criteria

    • The main considerations of working capital management decisions are (1) cash flow/ liquidity and (2) profitability/return on capital.
    • Working capital is the amount of capital which is readily available to an organization.
    • In addition to the time horizon, working capital decisions differ from capital investment decisions in terms of discounting and profitability considerations; they are also "reversible" to some extent.
    • Firm value is enhanced when, and if, the return on capital, which results from working-capital management, exceeds the cost of capital, which results from capital investment decisions as above.
    • Cash conversion cycle is a main criteria for working capital management.

  • Benefits of Inventory Management

    • The scope of inventory management concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods, and demand forecasting.
    • Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution system, functions to balance the need for product availability against the need for minimizing stock holding and handling costs.
    • Companies with effective inventory management do not have to spend large capital balances for purchasing enormous amounts of inventory at once.

  • NYSE

    • The New York Stock Exchange is the world's largest stock exchange by market capitalization at $14.242 trillion as of December 2011.
    • Buyers and sellers meet at a physical location (in this case, Wall Street) and announce their bid or ask prices.
    • The NYSE is by far the world's largest stock exchange by market capitalization of its listed companies at $14.242 trillion as of December 2011, and most of the largest US companies are listed on the NYSE.
    • Secondary markets like the NYSE serve a vital function as a setting where companies can raise capital for expansion through selling shares to the investing public.

  • Cost of Capital Considerations

    • Cost of capital is important in deciding how a company will structure its capital so to receive the highest possible return on investment.
    • One of the major considerations that overseers of firms must take into account when planning out capital structure is the cost of capital.
    • For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.
    • The weighted average cost of capital multiplies the cost of each security by the percentage of total capital taken up by the particular security, and then adds up the results from each security involved in the total capital of the company.
    • Describe the influence of a company's cost of capital on its capital structure and investment decisions

  • Optimal Capital Structure Considerations

    • The optimal capital structure is the mix of debt and equity that maximizes a firm's return on capital, thereby maximizing its value.
    • One of the major considerations that overseers of firms must take into account when planning out capital structure is the cost of capital.
    • For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital.
    • The weighted average cost of capital multiplies the cost of each security by the percentage of total capital taken up by the particular security, and then adds up the results from each security involved in the total capital of the company.
    • Explain the influence of a company's cost of capital on its capital structure and therefore its value

  • Long-Term Approach

    • Recognize the broader objectives of working capital, as well as how organizations can consider a long-term perspective when viewing the utilization of working capital.
    • This free working capital can be utilized in a variety of ways.
    • Working capital under-utilized incurs the opportunity costs associated with the time value of money, and organizations must use financial planning to ensure appropriate utilization of this capital over the longer term.
    • From a longer-term perspective, working capital profitability decisions revolve around how much should be available within any short-term time frame in order to maximize the return (on average) of existing working capital.
    • By looking at differences in working capital availability over a long period of historical data, the organization can make rough estimations of the optimal amount of working capital availability that allows optimal growth.