From corporate finance (Richard A. Brealey and Stewart C. Myers, Principles of Corporate Finance, 1981), set out as the chief executive's central job by Warren Buffett (Berkshire Hathaway letters, from 1977) and William N. Thorndike Jr. (The Outsiders, 2012).
Compares the expected returns and risks of every use of available capital (reinvestment, acquisitions, debt repayment, dividends, buybacks, or cash) and funds the best first.
When to reach for it
Leadership or the board has cash to deploy and several competing claims on it, each defended by its own sponsor.
How it runs
- Total the capital available now and expected later.
- List every possible use.
- Estimate the return of each on a common basis.
- Raise the bar for riskier uses.
- Fund from the top down until returns fall below the cost of capital.
- Hold cash when nothing clears the bar.
Where it sits in SOLVE eX
Go to the source
- Principles of Corporate Finance, 1981
- Berkshire Hathaway shareholder letters, 1977 onward
- The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success, 2012