What is value and what is supply chain surplus ?

• End goal of a supply chain is to maximise overall value generated.

• Value in supply chain / also called supply chain surplus: 

            (Value of 'final product' to customer) - (Costs incurred by whole of supply chain)

            

• Value of final product:  It is maximum amount customer is 'willing to pay for' it. It may be noted that this can be different than what is actually the price tag of a product

• Customer surplus: Difference between value of product and it's actual price 

• Strong relation is seen between Supply Chain Surplus and profits

• Supply Chain success is seen in terms of profitability of 'whole' supply chain, and not of an individual stage.

Difference between fiscal and monetary policy

Fiscal balance is very important. Fiscal balance is managed by government. Fiscal deficit should be ideally somewhere around 2.5% to 3%. Beyond that inflation takes place, inflation  is something like fever, it can quickly go out of control.

Fiscal policy is totally under control of govt, ministry of finance, now also coordinated by Prime minister's office PMO in India

Monetary policy is by RBI. Two types of monetary policies exist, expansionary and contractionary.

Expansionary- more credit availability, when there is slowdown in economy, RBI reduces bank interest rate, people take loans, availability of credit increases, we have increase in economic activities, employment increases, expenditure increases, revenue collection increases.

Contractionary—Here we already have inflation, excess money supply exists, value of money is falling, prices are rising, less credit availability has to be done to tame inflation. 

How to see if stock is overpriced or underpriced ?

 One of the traditional methods of check if stock is over or underpriced, or to see the 'intrinsic value' of stock is through CAPM model, also called Capital Asset Pricing Model. It shows how much return is expected for a stock over and above market return. One good thing is that this model considers Risk/Volatility for a share as well, and does not just look at returns over time.

Ke = Rf + (Rm - Rf) * Bj

Here Ke- Required rate of return

Rf- Risk free rate of return

Rm- Market rate

B- Beta- Systematic risk of share

• Rf- Example of risk free rate of return Rf is government securties, government would not run away with your money, and even if they fall short, the will just print the money ;)

• B- Beta is how 'fast' or 'slow' share has moved against market return. Regress or plot the closing stock price against closing market over a year, can be done in excel as well... and you will get the Beta value. Beta is between -1 and +1. Stocks having Beta in opposite direction- good for making portfolio of stocks, so that we are covered for market variation in both directions. Higher the Beta, 'riskier' the stock-> and more return should be expected from the stock considering the risk.

• Rm - Market rate is the rate for the whole market

What is working capital cycle ?

Working capital cycle starts from raw material- > Which is converted to WIP (Work in progress)-> Converted to finished goods

• Finished goods are sent to warehouse for selling
• Sale of finished goods can be a cash sale or credit sale
• Cash sale- immediately finished goods converted into cash
• Credit sale- typically gives time of 2/3 months. Product sold , money returned with profits at end of 3 months. This also converts raw material into cash. Every time completing this cycle, we keep on adding profit,
• For example, Start with $ 100- addition of WCC, get 10% profit on sales, $ 1 profit, every time we complete this cycle, profit will keep adding on to our cash.
• Important: Every time we complete cycle, we get profitable. This cycle is typically calculated for period of one year.
• For FMCG, this cycle runs fast. Faster the cycle, more profitable company is. However, if manufacturing an airbus, of course working capital cycle is slow.
• In general, every company would be interested to increased number of cycles per year, reduce time taken by each step of working capital cycle.

What is considered ideal capital structure for a company ?

Capital structure of a company can be in form of debt or equity, or what is typical-> combination of both.

As per the traditional approach, 'moderate' degree of debt can lower firm's overall cost of capital, and increase firm's value.

Here with moderate amount of debt, even with initial increase in cost of equity, it is more than offset by lower cost of debt.

Subsequently, as debt increases-> Shareholders perceive increased risk -> Cost of equity rises (with increase in opportunity cost) -> Then comes a point where advantage of reduced debt cost is more than offset by more expensive equity.

This is shown in the attached graph (sorry for bad handwriting :)) of cost vs debt- > Optimum leverage is the curve within the dotted lines. See how Ko- Overall cost of capital changes with increased Ke- equity cost of capital, and Kd- debt cost.