Increasing Shareholder Wealth
Black Thursday - Capital Spending Risks
October is a month of ghouls, goblins, and financial risks. Many of the worst stock market crashes were sustained during this month, with October 24, 1929 being designated Black Thursday. In 1929, most Americans kept savings in banks rather then speculating on the stock market. Businesses looking to increase capital and already wealthy patrons were the main investors of the era. "If you had $1000 on 9/30/1929, it would have gone down to a whopping $108.14 by July 8th, 1932 or an 89.2% loss. To recover from a loss like that, you would have to watch your portfolio go up 825%!" (Woodard, 2006). While the stock market is only one of several contributing factors to the depression, another often overlooked commodity was the machinery in factories. In many cases, the condition of the equipment was old and deteriorating. Perhaps if businesses were more familiar with present day practices of capital budgeting analysis, they would have realized that maximizing wealth depended upon several factors. Fortunately, today's investors and firms have more financial tools with which to contrast and compare capital expenditures and projects in order to gain returns on their investments. Using standard economic corporate analytics, based upon sound research and figures, a firm can easily determine the present and future value of money thereby minimizing risks while maximizing shareholder wealth.
While they are mainly two ways to raise capital, issues stocks and borrow money, shareholders are always interested in increasing their potential investments. When a corporation is producing all the currently possible widgets that the market will purchase, other financial opportunities for retained earnings are considered. Capital spending takes on many forms and the ideal situation will yield a high rate of return on the investment whether based on technology upgrades or machinery to produce more widgets, or in other monetary investments. "The rate of return rule says that organizations should invest in projects that offer a rate of return that is higher than the opportunity cost of capital, or the return the investors are currently getting from their investment in the company, without the new investment" (University of Phoenix, 2005). Using the net present value (NPV) of money, a firm can mathematically calculate rates of return over time and opportunity costs. Additional rules of financing also assist in analyzing capital spending (Ross, Westerfield, and Jaffe, 2005).
Discounted cash flow is a valuation technique that discounts projected cash inflows and outflows to evaluate the potential value of an investment. There are three discounted cash flow methods: Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR). The net present value discounts all cash inflows and outflows at a minimum rate of return, which is usually the cost of capital. The profitability index refers to the ratio of the present value of cash inflow to the present value of cash outflows. The internal rate of return refers to the interest rate that discounts cash inflow projections to the present to ensure that the present value of cash inflows is equivalent to the present value of cash outflows (Brown, 1992).
When “Black Tuesday” struck Wall Street on October 29th, 1929 investors traded 16 million shares on the on the New York Stock Exchange in just a day which caused billions of dollars to be lost and thousands of investors who got all their money wiped out. After the fallout of “Black Tuesday” America’s industrialized country fell down into the Great Depression which was one of the longest economic downfalls in history of the Western industrialized world. On “Black Tuesday” stock prices dropped completely. After “Black Tuesday” stock prices couldn’t get any worse or so they thought but however prices continued to drop U.S fell into the Great Depression, and by 1932 stocks were only worth about 20 percent of their value. Due to this economic downfall by 1933 almost half of America’s banks had failed. This was a major economic fallout which resulted in the Great Depression because it caused the economy to lose a lot of money and there was no way to dig themselves out of the hole of
In October 1929, the United States stock market crashed due to panic selling. This crash started a rippling effect that contributed to a world wide economic crisis called the Great Depression. This crash was such a shock because of the economic expansion of the 1920’s when the Dow Jones average reached an all time high of three hundred eighty one. The year 1928 was a time of optimism and the stock market had become a place where everyday people truly believed that they could become rich. People everywhere were talking about the market and newspapers were reporting stories of ordinary people such as chauffeurs, maids, and teachers making millions off the stock market. People who didn’t have the money bought on margin. The stock market was booming and the excitement about the market caused a lot of over speculation. People ignored the small signs of the impending crash until Black Thursday, October 24, 1929. Four days later the stock market fell again.
During the 1920's, the North American economy was roaring, but this decade would eventually be put to a stop. In October of 1929, the stock market began its steepest decline to this date in history. Many stock market traders and economists believe and pray that it was a one-shot episode never to be repeated. On the other hand, many financial analysts and other economists believe that the current stock markets are in place to repeat the calamitous errors of the 1920's. In this paper, I will analyze the causes of the crash and discuss the possibilities of it re-occurring.
The stock market crash of 1929 is the primary event that led to the collapse of stability in the nation and ultimately paved the road to the Great Depression. The crash was a wide range of causes that varied throughout the prosperous times of the 1920’s. There were consumers buying on margin, too much faith in businesses and government, and most felt there were large expansions in the stock market. Because of all these...
Finally, investors went into “panic mode” on October 24th, 1929, and began trading and dumping their shares, totaling a record of 12.9 million. Of course, following “Black Thursday,” the more well-known “Black Tuesday” ensued as a result of this. Between Black Monday and Black Tuesday, the market lost 24% of its value, and investors bought and traded over 28.9 million stocks. These stocks, now worthless, were used as firewood for some investor’s homes. The Dow Jones Company is perhaps the greatest example for this crash. Dow Jones started at 191 points at the beginning of 1928, then more than doubling to 381 points by September 1929. The crash caused their record 381 points to plummet to less than 41 p...
After nearly a decade of optimism and prosperity, the United States took a turn for the worse on October 29, 1929 the day the stock market crashed, better known as Black Tuesday and the official beginning of the Great Depression. The downfall of the economy during the presidency of Herbert Hoover led to much comparison when his successor, Franklin D. Roosevelt, took office. Although both presidents had their share of negative feedback, it is evident that Hoover’s inaction towards the crises and Roosevelt’s later eccentric methods to simulate the economy would place FDR in the positive limelight of fixing the nation in one of its worst times.
The United States signaled a new era after the end of World War I. It was an era of hopefulness when many people invested their money that was under the mattresses at home or in the bank into the stock market. People migrated to the prosperous cities with the hopes of finding much better life. In the 1920s, the stock market reputation did not appear to be a risky investment, until 1929.First noticeable in 1925, the stock market prices began to rise as more people invested their money. During 1925 and 1926, the stock prices vacillated but in 1927, it had an upward trend. The stock market boom had started by 1928. The stock market was no longer a long-term investment because the boom changed the investor’s way of thinking (“The Stock Market Crash of 1929”). The Stock Market Crash of 1929 was a mass hysteria because of people investing without any prior knowledge and the after effects that eventually led to the Great Depression.
Stock prices had been rising steadily since 1921, but in 1928 and 1929 they surged forward, with the average price of stocks rising over 40 percent. The stock market was totally unregulated. Margin buying in particular proceeded at a feverish pace as customers borrowed up to 75 percent of the purchase price of stocks. That easy credit lured more speculators and less creditworthy investors into the stock market. The Federal Reserve board warned member banks not to lend money for stock speculation because if prices dropped, many investors would not be able to pay back their debts. No one listened. The stock market began sliding in early September, but people ignored the warning. Then on "black Thursday" (October 24, 1929) and again on "black Tuesday" (October 29, 1929) the ball dropped. More than 28 million shares changed hands in frantic trading. Overextended investors, suddenly finding themselves in heavily in debt, began selling their stocks. Many found that no one would buy anything at any price. Overnight, stock values fell from a peak value of 87 billion dollars to 55 billion dollars.
On Thursday, October 24th, 1929, people began to sell their stocks as fast as they could. Sell orders flooded the market exchanges. (1929…) This day became known as Black Thursday. (Black Thursday…) On a normal day, only 750-800 members of the New York Stock Exchange started the exchange. (1929…) There were 1100 members on the floor for the morning opening. (1929…) Furthermore, the exchange directed all employees to be on the floor since there were numerous margin calls and sell orders placed overnight. Extra telephone staff was also arranged at the member’s boxes around the floor. (1929…) The Dow Jones Average closed at 299 that day. (1929…)
October 29th, 1929 marked the beginning of the Great Depression, a depression that forever changed the United States of America. The Stock Market collapse was unavoidable considering the lavish life style of the 1920’s. Some of the ominous signs leading up to the crash was that there was a high unemployment rate, automobile sales were down, and many farms were failing. Consumerism played a key role in the Stock Market Crash of 1929 because Americans speculated on the stocks hoping they would grow in their favor. They would invest in these stocks at a low rate which gave them a false sense of wealth causing them to invest in even more stocks at the same low rate. When they purchased these stocks at this low rate they never made enough money to pay it all back, therefore contributing to the crash of 1929. Also contributing to the crash was the over production of consumer goods. When companies began to mass produce goods they did not not need as many workers so they fired them. Even though there was an abundance of goods mass produced and at a cheap price because of that, so many people now had no jobs so the goods were not being purchased. Even though, from 1920 to 1929, consumerism and overproduction partially caused the Great Depression, the unequal distribution of wealth and income was the most significant catalyst.
On an October morning, the United States woke up and realized that the stock market had crashed. Everyone was shocked and confused. The people lost most if not all of their possessions. The Great Depression was during the 1930s and made people do, think, and feel in many ways they hadn’t. They had to conserve what they had and most of the time it was nothing. They felt sad, scared, and confused in a different way. It wasn’t just the people it was the government, the police, the authority, and even the other neighboring countries of the United States. According to Maury Klein in Rainbow’s End she says, “Black Thursday, 1929. The market opened, said one broker, ‘Like a bolt out of hell.’ The dreaded tsunami of selling crashed down at once. Never had so many orders poured in so fast from so many places; 1.6 million shares changed hands in the first half hour alone and the pace never slowed. No sooner was a phone hung up than it rang again.” The rich became poor. The poor became poorer. The people with money were scared to share it thinking they might lose all of it. No one trusted anyone except themselves and their family. Money is the key to survival in this world. But during that time the people were poor. They didn’t have money, so how did they survive?
Star Appliance is looking to expand their product line and is considering three different projects: dishwashers, garbage disposals, and trash compactors. We want to determine which project would be worth doing by determining if they will add value to Star. Thus, the project(s) that will add the most value to Star Appliance will be worth pursuing. The current hurdle rate of 10% should be re-evaluated by finding the weighted average cost of capital (WACC). Then by forecasting the cash flows of each project and discounting them by the WACC to find the net present value, or by solving for the internal rate of return, we should be able to see which projects Star should undertake.
The Net Present Value (NPV) is a Discounted Cash Flow (DCF) technique that relies on the concept of opportunity cost to place a value on cash inflows arising from capital investment, where opportunity cost is the "calculation of what is sacrificed or foregone as a result of a particular decision".
This is the rate of return (the discount rate) at which the net present value of the investment is zero, or that is the discount rate at which the discounted income from the project is equal to the investment costs