The Check Is In The Mail

If you have looked at your billing statements, many companies are now asking you to sign up for auto billing, which allows them to withdraw the amount of your bill from your checking account, or automatic payment by credit card. The push for such payment plans reduces postage and processing costs for the companies, but as importantly, also means that the company gets the cash quicker. On the other side, companies like to pay as slowly as possible. Cox Communications has a unique way of accomplishing the delay in payments to customers. As a customer reports, Cox accepted a deposit to set up an account on a credit card. However, when the account was closed, Cox insisted on mailing a check. Although Cox denied that a delay was the reason for the paper check, this allows Cox time for processing and mailing, which keeps the money in Cox's cash account longer. And, since many people who cancel an account are moving, the mailing time is likely doubled.

Which Risk?

In the textbook, we concentrate on risk based on the volatility of an asset. However, there is also purchasing power risk, that is, the return on your investment won't keep pace with inflation. To give you an idea of purchasing power risk, 20 years ago a gallon of gas cost $1.36. As an investor, you may not like the volatility of stock investments, but, over the long-term, investments in safer asset classes such as Treasury bills, CDs, and savings accounts have barely outpaced inflation.

Middle Class Tax Break?

One thing that really bothers us is when popular press financial writers do not understand basic finance. For example, this article argues that the deductibility of 401k deposits decreases tax revenue by $163 billion. While we are sure that the author got the numbers used from another source, the fact that this number is used shows little understanding of finance. In fact, the deductibility of retirement account deposits actually increases tax receipts. Suppose you deposit $5,000 into a 401k. In the 30 percent tax bracket you would save $1,500 in taxes today. In 30 years at a 10 percent interest rate you would have $87,247. If you withdraw all of the money, you would pay $26,174 in taxes at the same 30 percent tax rate. Guess what the future value of $1,500 today for 30 years at 10 percent is? You got it --- $26,174! The tax deductibility of the deposit does not affect the tax receipts, only the timing of the tax receipts. At a 10 percent interest rate the NPV of the taxes is zero. Further, compared to a taxable account, the tax deductibility and tax deferral in a 401k actually increases tax receipts in the long run. The reason is that in a taxable account, all capital gains would be taxed at the capital gains tax rate, which is lower than the income tax rate for most people. In a 401k, the capital gains are taxed at the higher income tax rate, resulting in greater tax receipts.

A Yen For A Stronger/Weaker Yen

Japanese executives have been arguing that the yen has been too strong in recent months. The strong yen hurts Japanese exporters. Toyota says that a single yen change against the U.S. dollar over a full year changes operating profit by ¥35 billion ($397 million). For Nissan and Honda, the operating profit changes are ¥20 billion ($227 million) and ¥16 billion ($182 million), respectively. The downside is that a weaker yen increases energy prices since Japan imports most of its energy needs. Now, executives are worried that the weakening of the yen could go too far, eroding confidence in both Japan and the yen, resulting in a further weakening of the yen.

Risk And Reward In Capital Budgeting

One of the problems in capital budgeting is that we are dealing with projections about the future, which are particularly troublesome. Scenario analysis allows us to examine the best-case and worst-case values of a project. In a recent article, two questions are posed about a new project or acquisition: 1) How much can the firm afford to invest to achieve its goals? and 2) How much is the firm prepared to lose? Both of these must be answered before a firm undertakes a new project. Importantly, the firm must to be able to accurately estimate potential losses and be aware that these losses may be realized.

2012 Stock Picks

In 2012, the major U.S. stock market indices were all up. The Dow Jones gained about 5 percent, the S&P 500 about 11 percent, and the NASDAQ about 15 percent. The real winners, at least of those invested in S&P 1,500 stocks, were those who bought Headwaters Inc., up 273 percent for the year. And 3D Systems Corp. investors had their pockets bulge with a 260 percent return.

India's IPO Refund

India's IPO market has been one of the wildest in the world. In 2011, a number of IPOs jumped as much as 100 percent on the first day, only to fall shortly afterwards, giving rise to concerns about market manipulation. In an effort to alleviate these concerns, India has implemented a change in the way trades are settled in IPOs. Traditionally, say you buy 100 shares of stock for $4,000, sell the shares for $4,100, and then buy another 100 shares for $4,020, the sell would cancel $4,100 since you received the money and you would only need to deposit $3,920 at the end of the day. Under the new rules, buys and sells are settled separately so you would have to deposit $8,020 in the first 10 days of an IPO. This makes investors tie up more capital, allowing for less trading. A second proposed rule would require the company to reimburse investors up to 50,000 rupees (about $920) if the stock falls more than 20 percent in the first 3 months of listing in a rising or flat market, or falls 20 percent more than a market decline in a falling market.