Ugh! Gas hits $2.50

NEW YORK (CNNMoney.com) -- The price of gas, rising for the 33rd straight day, has reached $2.50 a gallon, motorist group AAA reported Sunday.

The spike of more than 20% in a month is hitting Americans in their wallets and causing concern among some experts.
The jump in one of consumers' staple purchases comes at a fragile time for the economy. Recently some measures of housing, spending and credit have hinted that the most severe parts of the recession may be easing.

At the same time, gas has jumped in price as the American auto industry is on the verge of a dramatic reshaping amid plummeting vehicle sales.
According to AAA, the national average price for a gallon of regular unleaded gas has edged up to $2.502, from $2.488 the day before.
Late spring is typically a time of year when people drive more. But rising gas prices could cause people to stay home. That would mean less spending, which could dampen governments efforts to stimulate the economy.
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Summer pump jump
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"There's way too much optimism about a driving season lift," said Tom Kloza, chief oil analyst for the Oil Price Information Service.

Kloza said the impact will be especially painful in economic "sore spots" like California, Florida, Arizona and the rural South.

Currently, the highest gas prices are in Hawaii, where prices average $2.789 per gallon, and Alaska, where the average is $2.751.

In the lower 48, the highest prices are in two of the states hardest hit by the recession: California ($2.746) and Michigan ($2.745).

Michigan suffers the highest unemployment rate in the nation -- 12.9%. California is close behind at 11%.
The next most expensive states for filling up are:

Illinois, $2.692
Washington, $2.677
Wisconsin, $2.647
New York, $2.634
Indiana, $2.618
Ohio, $2.618
Connecticut, $2.615

The cheapest gas can be found in South Carolina, where the average is $2.309 a gallon.

Despite the recent surge, the average price of a gallon of gas remains well below its all-time peak of $4.114 on July 17, 2008.

But the repercussions of the 2008 gas spike are still being felt.
Last year's gas price spike severely hampered demand for SUVs and trucks, hastening the downward spiral for the Big Three automakers.

Chrysler filed for bankruptcy on April 30 and is awaiting a ruling from a federal judge as to whether it may sell its assets and form a new company. General Motors (GM, Fortune 500) is expected to file for bankruptcy next week and its stock price is trading below $1 a share for the first time since the Great Depression.

Developing countries

Developing countries (democratic or not) have been moved to harden their currencies, accept IMF rules, join the WTO, and submit to a broad regime of reforms that amount to a "hedge" against being isolated. China's entry into the WTO signalled the end of truly isolated nations entirely managing their own currency and affairs. The need for stable currency and predictable clearing and rules-based handling of trade disputes, has led to a global trade hegemony - many nations "hedging" on a global scale against each other's anticipated "protectionism", were they to fail to join the WTO.
There are signs, however, that this regime is far from perfect. U.S. trade sanctions against Canadian softwood lumber (within NAFTA) and foreign steel (except for NAFTA partners Canada and Mexico) in 2002 signalled a shift in policy towards a tougher regime perhaps more driven by political concerns - jobs, industrial policy, even sustainable forestry and logging practices.

discount future cash flows to thair present value

The rate used to discount future cash flows to their present values is a key variable of this process. A firm's weighted average cost of capital (after tax) is often used, but many people believe that it is appropriate to use higher discount rates to adjust for risk for riskier projects or other factors. A variable discount rate with higher rates applied to cash flows occurring further along the time span might be used to reflect the yield curve premium for long-term debt.

Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture. If, for example, the capital required for Project A can earn five percent elsewhere, use this discount rate in the NPV calculation to allow a direct comparison to be made between Project A and the alternative. Related to this concept is to use the firm's Reinvestment Rate. Reinvestment rate can be defined as the rate of return for the firm's investments on average. When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate rather than the firm's weighted average cost of capital as the discount factor. It reflects opportunity cost of investment, rather than the possibly lower cost of capital.

A NPV amount obtained using variable discount rates (if they are known for the duration of the investment) better reflects the real situation than that calculated from a constant discount rate for the entire investment duration. Refer to the tutorial article written by Samuel Baker[2] for more detailed relationship between the NPV value and the discount rate.
For some professional investors, their investment funds are committed to target a specified rate of return. In such cases, that rate of return should be selected as the discount rate for the NPV calculation. In this way, a direct comparison can be made between the profitability of the project and the desired rate of return.

To some extent, the selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm's weighted average cost of capital may be appropriate. If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would probably be a better choice.

Using variable rates over time, or discounting "guaranteed" cash flows different from "at risk" cash flows may be a superior methodology, but is seldom used in practice. Using the discount rate to adjust for risk is often difficult to do in practice (especially internationally), and is really difficult to do well. An alternative to using discount factor to adjust for risk is to explicitly correct the cash flows for the risk elements using rNPV or a similar method, then discount at the firm's rate.

income exceeds their expenditure

An entity whose income exceeds their expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.

A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business; this process is known as "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.

Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.