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Market Turmoil May Require New Essay

Specification of Thesis's Main Point:

Goldman (2009) surmises that today's economic crisis has changed many aspects of financial reporting, one of which is the calculation of the cost of capital.

Three Supporting Opinions/Reasons:

Utilizing much of his own personal, professional experience as well as other sources, Goldman's (2009) three supporting opinions all highlight the impact today's economic crisis has had. He quotes Marc Panucci, an SEC associate chief accountant, in his first supporting opinion. Panucci agrees with Goldman's theory that the turbulent economic environment of today requires changes to existing disclosures, in order to meet disclosure requirements. This is especially true when meeting disclosure requirements in liquidity, risks and uncertainties, and credit risks.

The Internal Revenue Service is Goldman's (2009) second supporting source. Not known for their empathy, the IRS has eased rules so that homeowner's facing tax liens can sell or refinance their homes. In fact, in some instances, "the IRS is willing to subordinate its interests in favor of mortgage holders" (p. 24). Of course, as Goldhorn notes, there is a 50% chance now that the federal government is the mortgage holder.

.Lastly, Goldman (2009) uses the state of the banking industry's stranglehold on capital currently as a third support for his position about how the economic environment has changed. Despite the fact that the government is giving money hand over fist to the banks, banks don't appear to be following suit. Where bankers are aggressive on the calling-loans-in front, they're much less aggressive on extending-new-credit front. Goldman notes that equity investors are nearly extinct as either their own resources have dried up or they're waiting for an even better deal. This, he purports, makes it very difficult to calculate...

24).
Three Opposing Opinions/Reasons:

The three opposing opinions to Goldman's (2009) thesis that the economic crisis has changed the means of calculating cost of capital are based on the definition of the cost of capital itself. First is the expected rate of return portion of the definition. As Goldman notes, this is a reflection of the investor expectations and is a forward-looking component. The particular investment in the dimension of the definition is the second opposing opinion to his thesis. This specifics of the investment affects the riskiness of the situation. Thirdly, attracting funds is a key component of the definition and implies that the funds pricing is set to attract investment. Each of these critical components of the cost of capital definition are the same, despite the economic challenges America is facing today.

Summary:

Goldhorn (2009) utilizes a variety of personal and outside sources to bring together a clearer picture of the economic troubles suffered by not only America but also countries around the world. From his personal loss of a significant portion of his net worth over the last two years to a client who had a net worth of $25 million not so long ago who is now having his home foreclosed upon to the uncharacteristically understanding attitude the IRS is taking, certainly these economic times are unlike anything experienced before in American history. Just as rampant inflation in the 1970s led to the development of FASB No. 33, these new challenges can affect the build-up method of calculating one of the most important components of business valuation -- cost of capital.

References

Goldhorn, M. (Jan/Feb 2009). Market turmoil require new ways to build capital. The Value Examiner. pp. 23-30.

Sources used in this document:
References

Goldhorn, M. (Jan/Feb 2009). Market turmoil require new ways to build capital. The Value Examiner. pp. 23-30.
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