Archive for the ‘Question of the Day’ Category

« Older Entries
Newer Entries »

Who says Facebook is worth $10 billion?

Tuesday, December 22nd, 2009

Valuation, the process of determining how much a corporation is really worth, is always partly objective and partly subjective. There are several different methods commonly used, but there’s going to be some guesswork involved no matter what.

The most common way to value a company is according to its earnings, which are usually calculated according to earnings per share: you simply divide the company’s net profit by the number of shares it has. (You want the earnings per share value because that makes it is a standard measure to reflect each piece of ownership in the company). You can also value a corporation according to its assets – that is, if a company paid off all its debts and added up everything of value it had left, how much money would that amount to? Another technique involves measuring cash flow, or how much money passes through a company in various transactions over the course of a quarter or fiscal year (not counting predetermined expenses like taxes and interest).

Investors compare “like” companies, as defined by industry, growth rates, or geography, based on their Price to Earnings (PE), Price to Cash Flow, or Price to Growth (PEG) ratios. Price to Growth is used for companies like Facebook, that are yet to have earnings! Higher quality companies get higher ratios, or valuations, versus lower quality earnings.  Historically, the average PE within the S&P 500 since 1936 is a PE of about 15.8x.

These are the most basic techniques, but there are many alternative techniques that are used or that some people claim are more effective. And ultimately, no matter which method you use, the “true value” of a company is only something that can ever be approximated; it’s more of an ideal than a calculable number.

Why would a company split its stock?

Tuesday, December 22nd, 2009

A company’s value is basically spread out among its shares; the more shares there are, the smaller the percentage of the company each one is worth. Think of it as a simple equation: value of one stock = value of the company ÷ number of shares. So if a company wants to try to manipulate the price of its stock, it has to change some part of this equation. You can’t change the value of your company at will, of course; that depends on your market performance. But companies can change the number of shares they offer, and hence the price per share, by using stock splits and reverse stock splits.

Stock splits are just what they sound like – splitting a single stock into multiple stocks. The most common stock splits are 2-for-1 and 3-for-2. A reverse stock split is also just what it sounds like – in, say, a 1-for-5 split, every five shares become one. Because a company can’t just suddenly generate value, a stock split means stock prices also split: for example, in a 2-for-1 split, each share becomes worth half of its original price. As a shareholder, you don’t have to worry about stock splits because the company will make sure the value of your holdings doesn’t change – if the stock goes through a 2-for-1 split, your shares just double, so you still have the same amount of money.

If the value doesn’t change, why bother fooling around with the number of stocks? If a company is doing very well, a single stock can grow to be worth a huge amount of money. You can’t buy a fraction of a share, and if you have to shell out a huge amount of money just to buy a single share, you probably won’t bother. So splitting the stock makes the price of each individual share go down, and more investors can afford to buy. A reverse stock split happens when a company’s stock prices are low; when the number of shares decrease, the price of a share increases, and the company’s stock appears more attractive to investors.

How big is your carbon footprint?

Monday, December 21st, 2009

Your carbon footprint is a measure of the greenhouse-gas emissions you produce in your everyday life. Your total carbon footprint is divided into two parts: your primary footprint, which is the emissions you directly cause (by using the stove, driving your car, running up an electricity bill, and so on), and your secondary footprint is made up of the indirect emissions which are a result of your lifestyle choices (eating at restaurants, going to the movies, buying a lot of clothes or electronic devices, etc.).

There are plenty of websites that can calculate your (primary and/or secondary) carbon footprint for you, but you have to provide some details first. For whatever period of time you want to measure (a month, six months, a year) you have to know your energy bills (gas, electricity, coal, propane, etc.), the number of miles you’ve traveled in your car and by public transport, and any airplane flights you may have taken. This information all contributes to your primary footprint. The secondary footprint is more approximate and requires you to input data like how often you eat at restaurants, how often you buy new clothes, and whether/how much you recycle. Once you know the value of your carbon footprint, you can see all the different factors that contribute to it and look for places where you can cut back.

Are scholarships taxable?

Monday, December 21st, 2009

Scholarships and fellowships are considered tax-free as long as two conditions are met:

First, (as obvious as this seems) you have to actually be enrolled at a university. Second, the scholarship or fellowship has to be used to pay for tuition or required books and supplies. Expenses due to room and board, traveling, or optional supplies don’t count (they’re considered incidental expenses, so they go towards calculating your adjusted gross income instead), and you have to report any payments you received for doing any kind of teaching or counseling that was required by your scholarship or fellowship (although there are some organizations that exempt you from this rule).

Students who receive scholarships or fellowships to do work in, say, a hospital setting may find the tax question a bit more fuzzy. If you’re ever unsure, just check with your sponsoring institution.

What happens if you don’t pay your taxes?

Monday, December 21st, 2009

Every taxpaying American citizen is required by law to file a tax return by April 15th of every year. Failing to submit your tax forms on time, or submitting them with incorrect information, is a crime that can earn you jail time if the IRS finds out, but you might wonder just how that happens. What is the process through which the IRS catches you and decides whether or not to press charges?

Businesses have to file tax returns for all their employees, so as long as you aren’t self-employed, tax infractions are relatively easy to spot. Even if you don’t work for anyone else, the IRS tends to audit the very wealthy more often, and since your tax records from years past are kept on file, the IRS can spot the discrepancy if you just stop paying taxes all of a sudden. The IRS also performs some random audits every year for statistical purposes, and every tax return that goes through gets a DIF score – basically, a measure of how suspicious it looks. If your DIF score is high enough, the computer program that evaluated your tax return will audit you automatically.

The good news is that the IRS generally won’t press charges even if they do bust you – they’ll probably just file a tax return on your behalf and then charge you for it. But anyone who files an incorrect tax return – or doesn’t file at all – is potentially at risk for jail time, so it’s worth it to keep careful records.

Death and taxes?

Monday, December 21st, 2009

As crazy as it may seem, there is actually such a thing as a “death tax,” and it’s exactly what it sounds like: the government does, in a manner of speaking, charge you money for dying. But since you, being deceased, are obviously not in a position to make any payments, it’s your heirs who have to take care of death taxes, also known as inheritance tax and estate tax.

Inheritance tax is the tax you have to pay in exchange for inheriting money in someone’s will; estate tax is the same principle applied to property instead of money. While these taxes are often staggeringly high – they’re currently at up to 45% and expected to grow in the years to come – they only apply to extremely high net worth estates (over $3.5 million as of 2009). Inheritance and estate taxes have long been controversial; their supporters argue that inheritors didn’t earn any of these assets themselves and so should have to surrender a big chunk of them to the government, while detractors say that people work hard to earn money with the expectation that it’ll be there to make their children’s lives easier. Some people attempt to set up complicated networks of trusts in order to avoid these taxes, but it isn’t easy to do so. The Bush administration attempted, unsuccessfully, to phase out inheritance and estate taxes, but for the present it seems that, much like death, they’re simply a fact of life.

It’s important to know, though, that the tax laws surrounding death can vary somewhat from state to state. Make sure to check with your local tax authority before dying.

How do you know if you have to file an income tax return?

Monday, December 21st, 2009

Income tax filing requirements are easy to describe but difficult to state specifically. Basically, you have to file a tax return if your income for the fiscal year is above a certain level. What is that level? That’s the tricky part. The numbers can vary from year to year, so if you’re not sure whether you qualify, you can check the IRS website to find out. But here are some general rules of thumb that determine the relative level you have to reach:

Here are the minimum income requirements for several filing statuses for 2008:

  • Single and under 65: $8,950 (though if someone else can claim you as a dependent on their tax return, this number will be slightly lower)
  • Single and over 65: $10,300
  • Head of household and under 65: $11,500
  • Qualifying widow(er) with dependent child and under 65: $14,400

Hungry for more filing facts? We’re here for you:

  • If you are over 65, your income has to be greater than a younger person’s to qualify for taxation.
  • If your filing status is head of household or qualifying widow(er) with dependent child, your income has to be greater to qualify than if you file as single.
  • If your filing status is married filing separately, you must file a tax return.
  • If someone has claimed you as a dependent on his or her tax return but you still received income for that year, you have to file a tax return if your income is above a certain level (usually relatively lower than for non-dependents).
  • You may also have to file a one-time-only tax return if you don’t normally make these levels but you come into a sudden sum of money (say you’re unemployed and win the lottery, for example).

So while the numbers may change, the basic principles behind them are that the IRS cuts you more of a break if you’re over 65, the head of a household, or widowed with a dependent child.

Can anybody look at your credit score?

Thursday, December 17th, 2009

While your nosy neighbor isn’t allowed to look up your credit score, almost any business with a legitimate purpose can. So what makes a credit inquiry legitimate as opposed to a neighbor’s snooping?

The rules that govern who can look at your scores are spelled out clearly in the Fair Credit Reporting Act. Someone who wants to see your score must have an acceptable business or financial reason to do so. People who are evaluating whether you qualify for credit cards, loans, insurance policies, jobs, or housing rentals all have a “legitimate” reason for looking at your credit score. For those situations, a credit score is vital in determining whether you are a good candidate or not – their businesses depend on this information to know you are consistent, trustworthy, and dependable with money. What this means is that any company that stands to gain from looking at your score is entitled to do so.

In most of these situations, though, a person must first authorize the company to obtain their credit score. If you don’t want your loan adviser to look at your credit score, then he won’t be able to. The only caveat is that if you refuse, you probably won’t be getting that loan…

What is the gray market?

Thursday, December 17th, 2009

Everyone has heard of the black market (at least in movies), but what is the gray market? Unlike the black market, the gray market is not technically illegal, but it is often unauthorized. Instead it’s a kind of loophole, as it involves distributing items in a way that the original manufacturer would not have wanted.

Let’s use cell phones as an example. An individual or private company buys a bunch of BlackBerrys at retail, wholesale, or discounted prices, and then resells the phones at a higher price. Usually, this new price is cheaper than what your local AT&T store will sell a BlackBerry for, so customers are more likely to spend their BlackBerry dollars there.

How long does that dollar bill stay in circulation?

Thursday, December 17th, 2009

With all the wear and tear that those bills go through, it’s surprising that they stay together as long as they do. You can only stuff them all wrinkled-up into your pockets so many times before they just give up. The Fed knows that we aren’t too careful with its bills and so they routinely collect them from banks for “processing” – shredding and disposal. The Fed also ensures that new money makes it back into circulation to replace the worn out stuff. It makes sense because you wouldn’t want your money constantly falling apart on you.

Since the Fed keeps track of all the worn-out money it’s disposing of, the average life span of dollar bills is easy for them to figure out. According to federalreserve.gov, this is the life expectancy for each type of bill:

  • $1 – 21 months
  • $5 – 16 months
  • $10 – 18 months
  • $20 – 24 months
  • $50 – 55 months
  • $100 – 89 months

The list above makes sense: the more used a bill is, the more worn-out it gets.

« Older Entries
Newer Entries »