Tutor profile: Vivek C.
What is fiscal stimulus and how does that tie to negative interest rates currently observed in some of the most developed economies of the world?
In layman terms, fiscal stimulus is "raining money". Jokes apart, fiscal stimulus is the expansionary policy being followed by the government and central banks to boost or pump up the slowing economy. Post the financial crisis of 2008, countries were grappling with the recession (people postponing consumption, private investments at all time low, unemployment etc.). To encourage corporates to spend and invest more, Fed and other central banks lowered the fed funds rate (or central bank rates) to make borrowing cheaper. The assumption being that with availability of cheaper funds, corporates shall start investing, people shall start borrowing to consume. However, there seemed to be negligible reactions to the low interest rate regime. In a one of a kind move, some European countries, Japan started treading along the unknown territory of negative interest rates, effectively meaning the borrower gets the principal and the interest as well. On the other hand, central banks started penalizing banks to deposit any excess cash with them since the interest rates were negative (they wanted them to lend instead of park with the central banks) Did this really work out and how can interest rates be pushed to the negative territory (as against the conventional economics) is an exciting topic to be discussed in the next Q&A. So, watch out for the space for more such interesting discussions!
Subject: Corporate Finance
Is negative working capital good or bad for a company?
Great that this question strikes your mind, more so if you have gone through Dell's balance sheet. Working capital(net) is the excess of current assets over current liabilities. Hence, when current liabilities are greater than your current assets, you have a net negative working capital. Theoretically speaking, negative working capital is a source of capital. And in reality, payables and receivables do not carry explicit rates of interest so the same can be safely assumed to be rather an interest-free source of capital. Wonderful, isn't it? Well, yes provided you can make sufficient arrangements not to go bankrupt in the next few days or may be weeks and months. This is so because as payables fall due, you do not have sufficient receivables and inventory to liquidate which leaves you with two options - either liquidate your fixed assets or borrow. To any finance student (and professional of course!), both may be a nightmare. So not really desirable! Now, how could Dell manage this! Well, the sole by-product of their huge bargaining power with the vendors or suppliers which allow them to dictate terms in the market. So to conclude, liquidity may give the biggest concern in case of negative working capital. Ceterus paribus, this may also give a boost to your profitability.
Can beta of an asset be negative?
Generally speaking, beta signifies the relative risk or volatility of an asset to that of market i.e. the incremental risk an asset adds to a market portfolio. It is measured by calculating the covariance of the stock to that of the market and dividing the same by the market variance. For beta to be negative, the asset has to be negatively correlated to the market i.e. when the market moves up, the asset moves down and vice-versa. Based on the above explanation, we can observe that over a shorter time frame, negative beta can be a possibility either due to the inherent nature of the asset (such as oil companies, entertainment industry, gold etc. ) or even market irregularities. However, it is not difficult to safely conclude that the same relationship may not hold true over a longer horizon as no industry / asset class can move opposite to the market conditions for a considerable longer period of time.
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