Monday, February 20, 2012

How the Wrong Cost of Capital Can Cost a Company

When discussing the WACC and cost of capital for a specific project, we made sure to stress that a company should adjust the cost of capital for the riskiness of the project if it is different from the risk of the company by using the pure play approach or subjective approach. In this discussion of the hurdle rate (cost of capital for a specific project), it appears that many companies are applying the subjective approach to adjusting the cost of capital, but applying an adjustment factor that is too high. Another important point: The article notes that the WACC for U.S. companies has been in the 7 percent to 9 percent range for the past 8 years.

Thursday, February 16, 2012

Moody's Keeps Busy

Credit rating agency Moody's warned that it could downgrade the credit rating of 17 global banks and 114 European banks. Moody's noted that several of the downgrades could be three notches, and that France, Great Britain, and Austria could lose their AAA credit rating.

Should You Buy Facebook After Its IPO?

Although many IPOs dramatically increase in price on the first day of trading, what if you can’t get shares in the IPO? Should you buy the stock anyway? While there is often a “pop” in price on the first day of trading, the long run performance of IPOs is less stellar. With the Facebook IPO looming, we can examine the performance of recent tech IPOs. For example, Groupon is down about 18 percent since its November 4, 2011 IPO and professional network website LinkedIn, which more than doubled on its first day of trading on May 19, 2011, is down more 23 percent since.