Money funding

Money Funds are very limited and are budgeted well in advance. Even small amounts (e.g. 100-200), which can make a significant difference, are usually not available. 

In this section we consider the pricing of a European option on the money fund. (This is the same as a bank account when the initial value B(0) = 1.) Thus, the payoff of a European call option with exercise price K is max[B(T) - K,0], The continuous version of the Ho-Lee model is assumed for the short interest rate process. The risk-neutral valuation methodology provides the solution as ... 

From an overall economic viewpoint, any investment proposal may be considered as an activity which initially absorbs funds and later generates money. The funds may be raised from loan capital or from shareholders capital, and the net (after tax and costs) money generated may be used to repay interest on loans and loan capital, with the balance being due to the shareholders. The shareholders profit can either be paid out as dividends, or reinvested in the company to fund the existing venture or new ventures. The following diagram indicates the overall flow of funds for a proposed project. The detailed cash movements are contained within the box labelled the project . 

Within the project box, the cashflow oi the project (or other investment opportunity) is the forecast of the funds absorbed and the money generated during the project lifetime. Take, for example, the development of an oil field as the investment opportunity. Initially the cashflow will be dominated by the capital expenditure (capex) required to design, construct and commission the hardware for the project (e.g. platform, pipeline, wells, compression facilities). 

DecoveTj of Capital. In Figure 1, the annual book depreciation is used to retire the fixed capital investment. Whereas this accounting model does not correspond to the typical money flow, it is one possible model for recovery of capital. This model assumes that the investment is reduced each year by the amount of the annual depreciation. Another model (22) assumes that a uniform yearly book depreciation payment is made to an interest-bear sinking fund that accumulates to the depreciable fixed capital amount at the end of the venture. Using this second model, the investment is outstanding throughout the lifetime of the project. This also does not correspond to the actual money flow in most cases. ProfitabiUty analysis utilizes a third model based on discounted cash flows. 

A fourth method of computing depreciation (now seldom used) is the sinking-fund method. In this method, the annual depreciation A is the same for each year of the life of the equipment or plant. The series of equal amounts of depreciation Aq, invested at a fractional interest rate i and made at the end of each year over the life of the equipment or plant of s years, is used to build up a future sum of money equal to (Cpc S). This last is the fixed-capital cost of the equipment or plant minus its salvage or scrap value and is the total amount of depreciation during its useful life. The equation relating i Fc S) and Ao is simply the annual cost or payment equation, written either as... 

One of the most important items in an income statement is depreciation expense. Although depreciation should not be thought of as a means to build up a fund to replace plant, it nevertheless does enable money to be retained in the business by reducing the profit available for distribution to stockholders. It is of course a duty of both accountants and management to see that sufficient money is retained in the business to replace assets and to invest such money in other processes or outside investment. 

Sometimes a company uses a sinking fund to retire a bond. A series of equal annual payments A, invested at a fractional interest rate i and made at the end of each year over a period of n years, is equivalent to a sum of money of present value P, given by... 

As indicated in Section 30.7, energy-conservation measures cost money, and in spite of the likely results indicated by any of the methods available (simple payback, discounted cash flow, etc.) it is possible that the organization s funds are not available for such schemes. Alternatives that should be considered are ... 

Many will blame such problems on lack of funds when the laboratory was built. This may not be the case. A well-planned and efficient laboratory does not have to cost more than a poorly planned one. It is mostly a matter of putting the available money to work where it counts most. This book gives many examples where money can be saved without causing operational problems later. It also presents cases where additional money spent at the outset has paid off in a safer and more efficient operation for years to come. 

To fund Patterson s project, Harrison Brown convinced the American Petroleum Institute that information about ocean sediments would help locate oil. Harrison got money from them every year, huge amounts, to fund the operation of my laboratory, which had nothing whatsoever to do with oil in any way, shape, or form, Patterson recalled. To me it was just a falsehood. .. a fib. But Brown continued to get Patterson the money he needed for several years. 

They.. . . not only stopped funding me, they tried to get the Atomic Energy Commission to stop giving me anything—they were still giving me some money. They went around and tried to block all my funding. But Pm so stupid that I didn t even know. ... 

Muskie s public hearing, held in Washington, D.C., in June 1966, revealed that 480,000 of petroleum industry money was helping to finance a Bureau of Mines study of antiknock compounds. With no funds to conduct its own research, the government agency had agreed to publish the petroleum-funded study only if the American Petroleum Institute approved its contents. 

The corporation earnings that are left after the dividends have been distributed to the stockholders can be used for capital improvements. This money costs nothing to the corporation. It usually amounts to about 5% of net sales. Capital expenditures for the large chemical companies generally are between 8 and 20% of the net sales. It is obvious that money from other sources is usually required. While undistributed profits cost nothing, they should not be thought of as valueless. Unless they can produce an increase of stock value and/or future dividends greater than the immediate cash value to the stockholder, these funds should be distributed as dividends. The profits can be considered to have the same value as stock. 

For Nell, this approach closely resembles the first of Marx s solutions in Capital, volume 2, to the problem of establishing where the money comes from to service the gap between the amount advanced by capitalists and the amount M they receive as income.2 As we saw in Chapter 3, Marx addresses this issue by positing that capitalists advance the amount M -M in addition to M. Under the Kalecki Principle, M —M is the amount of money cast into circulation by capitalists in order to realize profits. Ignoring for simplicity the role of capitalist consumption, this amount is required to purchase additional quantities of capital. Hence, capitalists advance the whole of M. On this view, theoretically, it is correct to speak of M becoming M, but in practice there is no initial sum of money, M, followed later by a larger sum, M there is only M (ibid. 207). In the single swap approach this advance of money is sufficient to fund total income in one run of the monetary circuit. 

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