The ending of the decade of the seventies and the dawning of the
eighties can be characterized as a period of great uncertainty with
prospects for economic- political instability. High inflation and
fluctuating exchange rates in the de- veloped Western world have served
to strengthen the forces of disequilibrium in the fmancial markets,
leading to an investment situation with several unusual but significant
factors. Capital spending by business, leading to the creation of new
jobs, has not been reduced substantially during this period of
uncertainty, as happened in similar periods in the past. This is shown
in part by the continuing low unemployment rates in evidence during the
period, which are in contradic- tion to the trend exhibited in similar
past periods. The expanding financing re- quirements resulting from high
price inflation have led to an increase in the capital intensity of
firms, and thus to enhanced sensitivity of their income streams to
economic fluctuations. At the same time, the record high interest rates
that companies have had to pay to acquire this inflated amount of
capital have caused a deterioration in the safety or quality indica tors
by which the creditworthiness of the firms is judged. These developments
tend to increase vii viii INTRODUCTION the stakes involved in business
decision making. One important repercussion of this is that greater
attention is now being focused on improving the quality of investment
decisions.
