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  • 2015 Spring: Volume 14, Issue 1
  • Changes in Financial Variables and Altman’s Z Score on Stock Price: Consideration of Firm Size and Market Risk

    • Reza Rahgozar ;
    • Mary Tichich

    Title:

    Changes in Financial Variables and Altman’s Z Score on Stock Price: Consideration of Firm Size and Market Risk

    Author(s):

    Dan Han
    Reza Rahgozar
    Mary Tichich

    Publication Date:

    2014

    Journal Title:

    The Journal of Finance Issues

    Volume Number:

    13

    Issue Number:

    2

    Abstract:

    The equivalent annual cost (EAC) method is a useful tool in asset pricing, lease financing and corporate investment. It deals with projects with different economic lives and has wide applications in many fields outside the finance or even business. However, the important EAC concept and its applications are not always very well understood even within the finance academia. There are a few misunderstandings surrounding this widely taught and practiced methodology as evidenced by our experience with finance professionals over the past decades and the lack of clarity in all the mainstream textbooks we have surveyed. One of them is the misconception that the EAC method requires infinite time horizon and infinite repetitions of the identical project or equipment. Given its importance and wide application, the finance profession has an obligation to serve well its gate-keeper role by not overlooking these misconceptions. Thus far, no one has raised and addressed these misconceptions. We fill in this void by explicitly revealing, explaining and addressing these misconceptions. Specifically, we argue that infinite horizon is a convenience but not a necessity by showing how the method can be used for projects or assets with finite horizons and what cautions one has to take. We also provide threads for future studies along this line. Our work makes a marginal contribution the finance theory, pedagogy and practice.

    First Page:

    1

    Last Page:

    10

    Total Pages:

    10