FOR DISCLOSURES AND OTHER IMPORTANT INFORMATION, PLEASE REFER TO THE BACK OF THIS REPORT. October 19, 2016 Authors Michael J. Mauboussin michael.mauboussin@credit-suisse.com Dan Callahan, CFA daniel.callahan@credit-suisse.com Darius Majd darius.majd@credit-suisse.com Capital allocation is a senior management team’s most fundamental responsibility. The problem is that many CEOs don’t know how to allocate capital effectively. The objective of capital allocation is to build long-term value per share. Capital allocation is always important but is especially pertinent today because return on invested capital is high, growth is modest, and corporate balance sheets in the U.S. have substantial cash. Internal financing represented more than 90 percent of the source of total capital for U.S. companies from 1980-2015. M&A, capital expenditures, and R&D are the largest uses of capital for operations, and companies now spend more on buybacks than dividends. This report discusses each use of capital, shows how to analyze that use, reviews the academic findings, and offers a near-term outlook. We provide a framework for assessing a company’s capital allocation skills, which includes examining past behaviors, understanding incentives, and considering the five principles of capital allocation. GLOBAL FINANCIAL STRATEGIES www.credit-suisse.com Capital Allocation Evidence, Analytical Methods, and Assessment Guidance