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Black Thursday - Capital Spending Risks Mba540

UOP MBA540 - 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...